CHAPTER 7-Corporations in Financial Difficulty: Liquidation

7-1 The Metro Bank loaned P40,000 to Ilocano Company. The loan is secured by inventory
with a book and fair value of P50,000 and P30,000, respectively. What amount will the
bank receive if unsecured creditors receive 25% of their claims?
a.
b.
c.
d.

P10,000
P30,000
P32,500
P40,000

7-2 The Abra Company owes P200,000 on a note payable plus P8,000 in interest to its
bank. The note is secured by inventory with a book value of P160,000 and a fair value of
P120,000. What amount will the bank received if unsecured creditors receive 75% of their
claims?
a.
b.
c.
d.

P120,000
P160,000
P180,000
P186,000

7-3 The Red Company owes P15,000,000 on the mortgage of its building to City Bank. The
building has a net book value of P20,000,000 and a fair value of P18,000,000. When Red
company file for liquidation, it owed interest of P90,000; when the building is sold for
P18,000,000, the interest due on the mortgage is P200,000. What amount will the bank
receive if the unsecured creditors received 80% of their claims?
a.
b.
c.
d.

P15,000,000
P15,160,000
P15,178,000
P15,200,000

Use the following for items 7-4 and 7-5:

When the Pasig Company filed for liquidation with Securities and Exchange Commission, it
prepared the following balance sheet:
Current assets (net realizable value, P50,000)
Land and building (fair value, P240,000)
Goodwill (fair value, 0)
Total assets
Accounts payable
Mortgage payable (secured by land and building)
Common stock
Retained earnings (deficit)
Total
7-4
a.
b.
c.
d.
7-5
a.
b.
c.
d.
7-6

P80,000
200,000
40,000
P320,000
P160,000
200,000
100,000
(140,000)
P320,000

What is the estimated deficiency to unsecured creditors?

P70,000
P90,000
P120,000
P140,000
What percentage of their claims are the unsecured creditors likely to get?
43.75%
50%
56.25%
100%
A company is to be liquidated and has the following liabilities:
Income taxes

P8,000

Notes payable (secured by land)

Accounts payable
Salary payable (evenly to two employees)
Bonds payable
Administrative expense for liquidation
The company has the following assets:
Current assets
Land
Building and equipment

120,000
83,000
6,000
70,000
20,000

Book Value
P 80,000
100,000
100,000

Fair Value
P 33,000
90,000
110,000

How much will the holders of notes payable collect following the liquidation?
a.
b.
c.
d.

P108,000
P 83,000
P 90,000
P120,000

7-7 Cebuano Company has had severe financial difficulties and is considering the
possibility of liquidation. At this time, the company has the following assets (stated at net
realizable value) and liabilities.
Assets (pledged against debts of P70,000)
Assets (pledged against debts of P130,000)
Other assets
Liabilities with priority
Unsecured creditors

P116,000
50,000
80,000
42,000
200,000

In liquidation, how much would be paid to the partially secured creditors?

a.
b.
c.
d.
7-8

P130,000
P 50,000
P 74,000
P200,000
The Moon Company has the following:
Unsecured creditors
Liabilities with priority
Secured liabilities:
Debt one, P210,000;value of pledged asset
Debt two, P170,000;value of pledged asset
Debt three, P210,000;value of pledged asset

P 230,000
110,000
180,000
100,000
140,000

The company also has a number of other assets that are not pledged in any way. The
creditors holding debt two want to receive at least P142,000. For how much do these free
assets have to be sold so that debt two would receive exactly P 142,000?
a.
b.
c.
d.

P308,000
P198,000
P340,000
P330,000

Use the following for items 7-9 and 7-10:

The following are data provided by Trinity Company:
Assets at book value
Assets at net realizable value
Liabilities at book value:
Fully secured mortgage
Unsecured accounts and notes payable
Unrecorded liabilities:
Interest on bank notes

P100,000
75,000
40,000
45,000
250

Estimated administrative expense

A trustee is appointed to liquidate the company.

4,000

7-9 The journal entry made by the trustee to record the assets and liabilities should
include an estate equity (deficit) of:
a.
b.
c.
d.

P14,250
P14,000
P10,250
P10,000

7-10 The statement of affairs prepared by the trustee at this time should include an
estimated deficiency to unsecured creditors of:
a.
b.
c.
d.

P35,000
P31,000
P14,250
P10,000

7-11 The