05 Corporate Liquidation

CORPORATE LIQUIDATION
LECTURE DRILLS
Theories.
1. Which of the following statements is true regarding the Statement of Affairs?

a. The Statement of Affairs is normally prepared at the end of liquidation.
b. The historical cost amounts are relevant in this statement.
c. This statement is not a going-concern report.
d. This statement reflects the book value of the debtor’s assets and its application of the
proceeds to specific liabilities.
2. These are the assets pledged to a specific liability which the estimated realizable value of the
assets exceeds the amount of liability
a. Assets pledged to partially secured creditors
b. Assets pledged to fully secured creditors
c. Assets pledged to unsecured creditors
d. Free assets
3. The following are considered unsecured creditors with priority except

a. Taxes
b. Wages
c. Administrative / Liquidation expenses
d. Loans
4. Which of the following statements regarding the Statement of Realization and Liquidation is
false?
a. This statement shows a complete record of the transactions of the receiver for a period of
time.
b. Realization of assets only means collection of receivables from customers.
c. The duty of the receiver is to realize the assets, to convert the non-cash assets into cash.
d. When done, this statement will generate a gain or loss.
Problems.
Problem 1
AAA Corp. is experiencing financial difficulty and considering filing for bankruptcy. The data
below are its Statement of Financial Position:
Cash 4,000 Accounts payable 82,000
Accounts receivable 40,000 Bank loan 25,000
Note receivable - short term 36,000 Loan payable 160,000
Prepaid Expenses 1,000 Wages payable 12,000
Note receivable - long term 50,000 Tax payable 8,000
Land 10,000 Mortgage payable 43,000
Building 70,000 Stockholders' equity (38,000)
Machine 20,000
Equipment 45,000
Intangible 16,000
TOTAL ASSETS 292000 TOTAL LIABILITIES & SHE 292000
Page 1 of 4
The following information are ascertained.
Estimated realizable values of the Assets:
Cash 4,000
Accounts receivable 30,000
Note receivable - short term 27,000
Note receivable - long term 55,000
Land 42,000
Building 60,000
Machine 6,000
Equipment 25,000
Secured liabilities:
 P5,000 of the total accounts payable was secured by P3,500 of the total estimated realizable
value of the machine.
 Bank loan was secured by 80% of the estimated realizable value of the accounts receivable
 Mortgage payable was secured by the land and building.
 P50,000 of the total loan payable was secured by the note receivable - long term.
Additional information:
 Accrued interest of the mortgage payable and long term note receivable were P10,000 and
P20,000 respectively.
 Estimated liquidation expenses were P15,000.
1. What is the estimated deficiency?

a. (71,000)
b. (96,000)
c. (86,000)
d. (92,000)
2. What is the estimated payment to the bank loan?

a. 24,546
b. 24,000
c. 25,000
d. 24,625
3. What is the estimated loss?

a. (43,000)
b. (80,000)
c. (63,000)
d. (26,000)
Problem 2
BBB Corp. is experiencing financial difficulty and considering filing for bankruptcy. The following data
below are given:
ASSETS Book value Estimated realizable value

Cash 50,000 50,000
Accounts receivable 80,000 55,000
Building 250,000 280,000
Page 2 of 4
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable 60,000
Salaries payable 80,000
Tax payable 70,000
Note payable 35,000
Mortgage payable 200,000
Stockholders' equity (65,000)
Additional information:
 The accounts payable was secured by the accounts receivable.
 The mortgage payable was secured by the building.
 Liquidation expenses were estimated in the amount of P15,000.
1. What is the amount received by the holder of the accounts payable?

a. 60,000
b. 55,000
c. 50,000
d. 52,500
2. What is the amount paid for the taxes?

a. 35,000
b. 70,000
c. 50,000
d. 0
3. What is the estimated deficiency?

a. (40,000)
b. (45,000)
c. (75,000)
d. (65,000)
Problem 3
A company is to be liquidated and has the following liabilities:
Income taxes 8,000
Notes payable (secured by land) 120,000
Accounts payable 83,000
Salary payable 6,000
Bonds payable (secured by building) 70,000
Administrative expenses for liquidation 20,000
The company has the following assets:

Book value Fair value
Current assets 80,000 33,550
Land 100,000 90,000
Building and equipment 100,000 110,000
How much will the holders of notes payable collect following the liquidation?
a. 120,000
b. 90,000
c. 100,500
Page 3 of 4
d. 108,000
Problem 4
The following data were taken from the statement of realization and liquidation of DLR Corporation for
the quarter ended September 30, 2022:
Assets to be realized 495,000

Assets acquired 540,000
Assets realized 630,000
Assets not realized 225,000
Liabilities to be liquidated 810,000
Liabilities assumed 270,000
Liabilities liquidated 305,000
Liabilities not liquidated 675,000
Supplementary credits 765,000
Supplementary charges 937,000
As of September 30, 2022, DLR’s capital stock is P450,000 and retained earnings is P432,000. No
additional shares were issued after that date.
1. What is the net income (loss) for the period?

a. 252,000
b. (252,000)
c. (315,000)
d. 315,000
2. What is the ending cash balance?

a. 1,305,000
b. 840,000
c. 1,050,000
d. 1,080,000
END
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CORPORATE LIQUIDATION

1. Which of the following statements is true regarding the Statement of Affairs?

3. The following are considered unsecured creditors with priority except

1. What is the estimated deficiency?

2. What is the estimated payment to the bank loan?

3. What is the estimated loss?

ASSETS Book value Estimated realizable value

1. What is the amount received by the holder of the accounts payable?

2. What is the amount paid for the taxes?

3. What is the estimated deficiency?

The company has the following assets:

Assets to be realized 495,000

1. What is the net income (loss) for the period?

2. What is the ending cash balance?

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