Question

Kamy Corp. is in liquidation under Chapter 7 of the Federal Bankruptcy Code. The bankruptcy trustee has established a new set of books for the bankruptcy estate. After assuming custody of the estate, the trustee discovered an unrecorded invoice of $1,000 for machinery repairs performed before the bankruptcy filing. In addition, a truck with a carrying amount of $20,000 was sold for $12,000 cash. This truck was bought and paid for in the year before the bankruptcy.

What amount should be debited to estate equity as a result of these transactions?
a. $0
b. $8,000
c. $9,000
d. $1,000

Answer 1

C) $9,000

Step-by-step explanation:

Debits to the equity state represent additional expenses or losses that were not previously recorded.

• gain/loss = cash - carrying value of truck = $12,000 - $20,000 = -$8,000 or $8,000 loss
• additional repair costs = $1,000 (machinery repairs)

Total unrecorded losses and expenses = $8,000 + $1,000 = $9,000