CHAPTER 5 Corporate Liquidation and Reorganization

PROBLEM 3

1.
Requirement A. Prepare the statement of affairs

BIG CORPORATION
STATEMENT OF AFFAIRS
AS OF JANUARY 1, 20X1
Available for
Realizable unsecured
Book values ASSETS values creditors
Assets pledged to fully secured
creditors:
5,000,000 Land and building 5,200,000
Loan payable (4,000,000)
Interest payable (30,000) 1,170,000

Assets pledged to partially secured

creditors:
600,000 Equipment - net 400,000
Note payable (600,000) -

Free assets:
80,000 Cash 80,000
440,000 Accounts receivable 334,400
200,000 Note receivable 200,000
- Interest receivable 20,000
1,060,000 Inventory 820,000
20,000 Prepaid assets - 1,454,400
Total free assets 2,624,000
Less: Unsecured liabilities with
priority (see below) (810,000)
Net free assets 1,814,400
Estimated deficiency (squeeze) 777,600
7,400,000 Totals 2,592,000

Unsecured
Realizable non-priority
Book values LIABILITIES values liabilities
Unsecured liabilities with priority:
- Administrative expenses 60,000
50,000 Accrued salaries 50,000 -
700,000 Current tax payable 700,000
Total 810,000

Fully secured creditors:

4,000,000 Loan payable 4,000,000 -
- Interest payable 30,000

Partially secured creditors:

600,000 Notes payable 600,000
Equipment - net (400,000) 200,000

Unsecured creditors:
Accrued expenses, net of accrued
442,000 salaries 392,000
2,000,000 Accounts payable 2,000,000 2,392,000
Total unsecured creditors 2,592,000

(342,000) Shareholders' equity - -

7,400,000 Totals 2,592,000
Requirement B. Compute the estimated deficiency

Total realizable value of assets 7,054,400

Less: Unsecured liabilities with priority

Administrative expenses (60,000)
Accrued salaries (50,000)
Current tax payable (700,000) (810,000)

Less: Fully secured liabilities

Loan payable 4,000,000
Interest payable 30,000 (4,030,000)

Less: Secured portion of partially secured Liabilities

Notes payable (fair value of equipment) (400,000)

Excess available to unsecured liabilities without priority (Net

1,814,400
free assets)

Less: Unsecured liabilities without priority

Notes payable - excess over fair value of
equipment (600K - 400K) (200,000)
Accrued salaries net of accrued salaries (392,000)
Accounts payable (2,000,000)

Estimated deficiency to unsecured non-priority creditors (777,600)

Requirement C

Estimated recovery percentage of unsecure creditors without priority

= 1,814,000 / 2,592,000
= 69.98 %

Requirement D

Mr. A can expect P 349,900 recovery from his claim.

500,000 x 69.98 % = 349,900

2.
Requirement A

I. Opening journal entry

Jan. 1
20x1 Cash 80,000
Accounts receivable 440,000
Note receivable 200,000
Inventory 1,060,000
Prepaid assets 20,000
Land 1,000,000
Building 4,000,000
Equipment, net 600,000
Estate deficit 342,000
Accrued expenses 442,000
Current tax payable 700,000
Accounts payable 2,000,000
Note payable 600,000
Loan payable 4,000,000

II. “new” assets and liabilities

Jan. 1
20x1 Interest receivable - new 20,000
Estate deficit 20,000
Jan.1
20x1 Estate deficit - new 30,000
Interest payable - new 30,000

III. Transactions during 20x1

Cash 330,000
a. Estate deficit 110,000
Accounts Receivable 440,000
Cash (180K + 20K) 200,000
b. Estate deficit 20,000
Note Receivable 200,000
Interest Receivable 20,000
Cash 590,000
c. Inventory 470,000
Estate deficit 120,000
Estate deficit 20,000
d. Prepaid assets 20,000
Cash 5,200,000
e. Land 1,000,000
Building, net 4,000,000
Estate deficit 200,000
Cash 440,000
f. Estate deficit 160,000
Equipment 600,000
Accrued expenses 50,000
g. Cash 50,000
Current tax payable 700,000
h. Cash 700,000
Loan payable 4,000,000
i. Interest payable 30,000
Cash 4,030,000
Note payable 600,000
j. Cash 440,000
Estate deficit 160,000
Estate deficit 54,000
k. Cash 54,000

Requirement B
 BIG CORPORATION in receivership
STATEMENT OF REALIZATION AND LIQUIDATION
For the six months ended June 30, 20x1
ASSETS
Assets to be
realized: Assets realized:
Accounts receivable 440,000 Accounts receivable 330,000
Note receivable 200,000 Note receivable 180,000
Inventory 1,060,000 Interest receivable 20,000
Prepaid assets 20,000 Inventory 590,000
Land and Building 5,000,000 Land and Building 5,200,00
Equipment, net 600,00 Equipment, net 440,000
Total 7,320,000 Total 6,760,000

Assets acquired: Assets not realized:

Interest receivable 20,000 Inventory 530,000

LIABILITIES
Liabilities Liabilities to be
liquidated: liquidated:
Accrued expenses 50,000 Accrued expenses 442,000
Current tax payable 700,000 Current tax payable 700,000
Interest payable 30,000 Accounts payable 2,000,000
Loan payable 4,000,000 Note payable 600,000
Note payable 440,000 Loan payable 4,000,000
Total 5,220,000 Total 7,742,000

Liabilities not
liquidated: Liabilities assumed:
Accrued expenses 392,000 Interest payable 30,000
Accounts payable 2,000,000
Total 2,392,000

Supplementary Items:
Supplementary Supplementary
expenses: income:
Administrative
expenses 54,000 -
Net gain during the
period 56,000
15,062,000 15,062,000

Requirement C

Ending balance of Cash

Cash
Beginning balance 80,000

Assets realized 6,760,000 5,220,000 Liabilities liquidated

54,000 Administrative expenses

1,566,000
Requirement D

Ending balance of Estate deficit

Estate deficit
1/1/x1 opening bal. 342,000

1/1/x1 new liability 30,000 20,000 1/1/x1 new asset

a. 110,000

b. 20,000 120,000 c.

d. 20,000 200,000 e.

f. 160,000 160,000 j.

k. 54,000

236,000 - end deficit (debit balance)

Reconciliation of cash by using the basic accounting equation:

ASSETS = LIABILITIES + EQUITY

Cash 1,566,000 Liabilities not liquidated 2,392,000
Assets not realized 530,000 Estate deficit (296,000)
Total 2,096,000 Total 2,096,000