San Sebastian College-Recoletos

Canlubang Campus
ACCOUNTING REVIEW/ SEMINAR PART I
ADVANCED FINANCIAL ACCOUNTING AND REPORTING
CORPORATE LIQUIDATION

CORPORATE LIQUIDATION LECTURE NOTES

Business failures take many forms, common one is the inability to settle financial obligations as they
become due. If the distressed company liquidates, it enters into bankruptcy procedures that are court
administered because of legal ramifications.

The process of corporate liquidation would include realization of assets and the distribution of the cash
proceeds, first to the different creditors, then the balance to stockholders, if any. Generally, the cash
provided would be less than the amount of all the liabilities so a payment deficiency to creditors would
occur. These activities are done by a court-appointed trustee under accountability techniques.

Actual liquidation, however, is preceded by a court-petition for bankruptcy, voluntary, if filed by the
distressed company itself; involuntary if initiated by its creditors. The voluntary petition is submitted
to the courts for resolution and a statement exhibiting the petitioners debts and assets (at fair values)
accompanies the petition. This statement is commonly called the Statement of Affairs.

The Statement of Affairs.

It is prepared under a quitting-concern assumption and makes the following classifications as to assets
and liabilities:

Assets:

(1) Pledged with Fully Secured Creditors estimated cash proceeds is equal to or more than the
amount of the secured claim.
(2) Pledged with Partially Secured Creditors estimated cash proceeds is less than the amount of the
secured claim.
(3) Free Asset any asset of the entity that has not been used to secure the payment of any of the
companys liabilities and therefore any cash proceeds therefrom is available to unsecured
creditors.

Liabilities

(1) Secured Liabilities that which is covered by a collateral asset

(a) Fully-secured the realizable value of the pledged asset is at least equal to the amount of the
claim.

(b) Partially-secured liabilities the realizable value of the pledged asset is less than the amount
of the claim. Every partially secured claim has a secured portion, which is covered by the
realizable value of the collateral and an unsecured portion, that which is not covered.

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(2) Unsecured Liabilities that which is not covered by a pledged asset.

(a) Unsecured liabilities with priority those that are specified under the Bankruptcy Law that
must be paid in full ahead of any other type of unsecured liabilities.

(b) Unsecured liabilities without priority is any other type of unsecured liability.

Unrecorded assets with market values are included in the statement of affairs under free assets
category and are called contingent assets; unrecorded administrative and liquidation expenses are
categorized as unsecured with priority, and are called contingent liabilities. The statement of affairs
measures in estimated terms what payments are to be received by the different types of creditors
in the event of liquidation.

Accounting and Reporting by the Trustee.

Accounting would be by simple financial records and reports detailing accountability for the custody of
assets and temporary assumption of liabilities. Assets and liabilities taken over are recorded in the
trustees books at carrying values in the books of the distressed company upon the transfer. Since the
stockholders equity items are not transferred, a reciprocal account, Estate Equity, is established in the
books of the trustee to balance the accounts. In turn, a reciprocal Trustee Account is established in
the books of the distressed company in representation of the net assets transferred out to the
responsibility of the trustee.

1. The trustee is required to prepare the following periodic statements and reports: (a) Cash receipts
and disbursements statement, (b) a Statement of Estate Equity; and (c) supporting exhibits of
assets still undisposed and liabilities not yet liquidated as at the end of the reporting period
(balance sheet). The Statement of Realization and Liquidation which is actual-transaction based
has lost utility value, and popularity, and thus will be illustrated only briefly.

PROBLEM SOLVING

Rauh Welt Corporation had the following statement of financial position:

Cash 5,000 Note Payable short term 97,000

Marketable Securities 30,000 Accounts payable 85,000
Accounts Receivable 25,000 Accrued Expenses 18,000
Inventory 51,000 Note Payable (long term) 208,000
Prepaid Expenses 3,000 Share Capital 95,000
Land 120,000 Retained Earnings (59,000)
Building 105,000
Equipment 95,000
Intangible assets 10,000

The note payable (short term) is secured by the inventory and the note payable (long
term) is secured by the land and building
Marketable securities have a fair value of P35,000 and dividends of P1,000 are due from
this investment

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 Only 15,000 can be collected from the accounts receivable
Inventory can be only sold at P48,500
Prepaid expenses include a refund of P1,000
The intangible assets have no resale value
Fair value of land and building P238,000 and fair value of equipment P58,000
Administrative expenses of P31,500 are estimated as liquidation expenses
Salaries of P12,000 and payroll taxes of P3,000 are accrued
Interest on the long term note payable of P8,000 has not been accrued

1. How much is the estimated deficiency?

a. P38,000 c. P43,000
b. P46,000 d. P47,000

2. What is the estimated recovery percentage?

a. 66.30% c. 65.57%
b. 72.16% d. 67.79%

3. What is the estimated recovery for partially secured creditors?

a. P83,497.60 c. P80,655.50
b. P80,301.45 d. P81,378.15

4. How much is the estimated recovery for unsecured creditors without priority?
a. P63,500 c. P59,655
b. P58,344 d. P57,702

5. What is the amount of net free asset?

a. P98,500 c. P87,500
b. P89,500 d. P90,500

The following information was gathered from the books of Begriff Corporation which is currently
undergoing bankruptcy proceedings:

Note Payable of P97,500 is secured by furniture and equipment with a carrying amount of
P120,000 that is estimated to be 75% realizable
A mortgage payable of P192,500 is secured by building valued at P35,000 less than the carrying
amount of P230,000
Assets not mentioned above have an estimated value of P62,500 an amount that is P15,000
above carrying amount
Total liabilities not mentioned above total P96,000, including claims with priority of P18,500

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 1. How much is the estimated loss on asset realization?
a. P65,000 c. P80,000
b. P50,000 d. P60,000

2. How much is the estimated recovery percentage?

a. 80.65% c. 54.71%
b. 56.77% d. 51.76%

3. How much is the estimated recovery percentage for partially secured creditors?
a. 96.67% c. 98.51%
b. 96.52% d. 96.29%

Bancarote Inc. is under court supervised liquidation due to its insolvency. The court appointed liquidator
has provided the following data after conducting an inventory of Bancarotes assets and liabilities:

The total assets which are not used as security for any liability amounted to P5M while total
unsecured liabilities amounted to P20M.
The total assets which are used as collateral or security for corporate obligations amounted to
P10M. of these assets secure a mortgage payable with a book value of P2M including interest
while remainder secure a note payable with book value of P3.5M including interest
Salaries payable amounted to P2M while taxes due to government amounted to P1M.

1. What is the estimated recovery percentage of unsecured creditors without priority?

a. 25% c. 41.67%
b. 37.5% d. 52.5%

2. Using the same data in number 1, what is the amount received by partially secured creditors?
a. P2,750,000 c. P2,916,700
b. P2,875,000 d. P3,025,000

Liberty Corporation provided the following balances in July 1,2017:

Cash 5,500 Accounts payable 59,500

Accounts Receivable 35,000 Wages payable 25,000
Inventories 60,000 Tax payable 35,000
Notes receivable 78,000 Note payable 65,000
Equipment 256,000 Mortgage payable 175,000
Share capital 120,000
Deficit (45,000)
Total 434,500 Total 434,500

In the statement of realization and liquidation the following data are ascertained for the month of July:
The note payable and mortgage payable together with their respective interests are paid.

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 Only 7/8 is collected from the existing accounts receivable at the beginning of the month
Half of the inventories were sold for P45,000
Only 68,500 of the notes receivable is collected
Equipment is sold for P225,000
Administrative expenses of P13,800 are paid
Additional credit sales amounting to P10,500 are made for the remaining inventories
Interests accrued for the month are note receivable of P1,500, note payable P5,500 and
mortgage payable P10,500
All existing noncash assets at the beginning of the month are sold or collected during the month

1. How much is the profit or loss in the statement of realization and liquidation?
a. (42,475) c. (77,675)
b. 27,975 d. 75,175

2. How much is the estate equity at July 31,2017?

a. (102,975) c. 150,175
b. 32,525 d. (2,675)

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