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ACC16 AIR-01


I. Introduction
When the financial position of the debtor is such that it cannot resolve its financial
difficulties it will have to resort to liquidation. This process may be started by the debtor
filing a voluntary petition or by creditors filing an involuntary petition which entails the
process of an orderly realization of the debtor’s assets and payment of the debtor’s

II. Accounting and Reporting for Liquidation

The basic focus of accounting for liquidation is that of a “quitting concern” rather than a
“going concern” which is the usual assumption in accounting. The statement of affairs is a
statement that has been devised to address the issue of liquidation. And in the process of
liquidation, the trustee in bankruptcy must report periodically to those interested parties
regarding the progress of the liquidation process, and for this objective, a statement of
realization and liquidation must be prepared.

III. Statement of Affairs

Statement of Affairs is a statement of financial condition that emphasizes liquidation values
and provides relevant information for the trustee in liquidating the debtor corporation. This
statement is being prepared as of specific date or any given point in time and it shows
balance sheet information with assets measured at expected net realizable values and
classified on the basis of availability for fully secured, partially secured, priority and
unsecured creditors. Liabilities are classified in the statement of affairs as priority, fully
secured, partially secured and unsecured. Historical cost valuations are included in the
statement for reference purposes.

The following are captions commonly found in the statement of affairs:

1. Assets Pledge to Fully Secured Creditors: These are the assets with realizable values
equal to, or in excess of the liabilities for which they have been pledge as collateral.
2. Assets Pledge to Partially Secured Creditors: These are assets with realizable values that
are less than the liabilities for which they have been pledged as security.
3. Free Assets: These are assets not pledge to specific liabilities or pledge assets with a
realizable value in excess of the amount needed to satisfy claims of secured creditors.
Unrecorded assets with market values are included in the statement of affairs under
free assets category and are called contingent assets.

4. Fully Secured Creditors: These are liabilities covered by a pledge of specific assets of
realizable value equal to or in excess of such liabilities.
5. Partially Secured Creditors: These are liabilities covered by a pledge of specific assets of
a realizable value that is less than such liabilities.
6. Unsecured Liabilities with Priority: These are specified items that must be paid in full
ahead of any other type of unsecured liabilities.

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ACC16 AIR-01

Unrecorded administrative and liquidation expenses are categorized as unsecured with

priority and are called contingent liabilities.

7. Unsecured Liabilities without Priority: These liabilities have neither legal priority nor
security interest in specific property. They are paid off (pro-rata when there is an asset
deficiency) after all priority and secured liabilities have been satisfied.
8. Stockholder’s Equity: The balances of the stockholder’s equity accounts depend on the
amount of free assets available. If there is a deficiency of assets to satisfy unsecured
creditors, all claims of equity holders are extinguished. Only if there are free assets in
excess of unsecured liabilities can stockholders share in any distribution.

IV. Statement of Realization and Liquidation

A statement of realization and liquidation is an activity statement that is intended to show
progress toward the liquidation of a debtor’s estate. Its original purpose was to inform the
bankruptcy court and interested creditors of the accomplishment of the trustee.


The unsecured creditors of ABC Corporation filed a petition on February 14, 2014 to force ABC
Corporation into bankruptcy. The court order for relief was granted on February 28, 2014 at which
time an interim trustee was appointed to supervise the liquidation. A listing of assets and liabilities
of ABC Corporation as of February 28, 2014, along with estimated realizable values, is as follows:

Assets Book Value Estimated Realizable Value

Cash 61,400.00 61,400.00
Accounts Receivable 250,000.00 15% of the accounts receivable is estimated to be
Allowance for D/A (20,000.00) uncollectible
Estimated selling price, P340,000 which will require
Inventories 420,000.00
additional costs of P50,000
Prepaid Expenses 40,000.00 -
Investments 180,000.00 110,000.00
Land 210,000.00 An offer of P500,000 has been received for land and
Buildings (net) 260,000.00 buildings
Machinery & Equipment (net) 220,000.00 53,900.00
Goodwill 200,000.00 -
Total Assets 1,821,400.00

Liabilities and Equity

Accounts payable 670,000.00
Wages payable 3,400.00
Notes payable 160,000.00
Accrued interest-note 5,000.00
Mortgage payable - secured by land
and buildings

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ACC16 AIR-01

Common Stock 800,000.00

Additional paid-in capital 80,000.00
Deficit (297,000.00)
Total Liabilities and Equity 1,821,400.00

Additional information:
a. Patents completely written-off in the books in the past years but with a realizable value of
b. The books do not show the following accruals (unrecorded expenses/additional liabilities):
 Taxes – P16,400; and
 Interest on Mortgage – P10,000
c. The investments have been pledged as security for holder of the notes payable.
d. The trustee fees and other costs of liquidation are estimated to be P60,000.

1. The total free assets should be:
a. 1,831,400 b. 1,821,400 c. 717,800 d. 638,000
2. The net free assets should be:
a. 717,800 b. 698,000 c. 638,000 d. 628,000
3. The estimated deficiency to unsecured creditors should be:
a. 87,000 b. 47,800 c. 27,000 d. 7,200
4. The expected recovery % of unsecured creditors should be:
a. 96% b. 95% c. 88% d. 86.62%
5. The estimated payment to creditors should be:

Unsecured Creditors
Fully Secured Partially Secured
With Priority Without Priority
a. 410,000.00 110,000.00 79,800.00 638,000.00
b. 500,000.00 158,400.00 60,000.00 589,600.00
c. 410,000.00 165,000.00 79,800.00 670,000.00
d. 410,000.00 158,400.00 79,800.00 589,600.00

6. The estimated net gain or loss on asset realization should be:

a. 583,600 b. 593,600 c. 670,000 d. 680,000

7. The estimated net loss should be:

a. 583,600 b. 593,600 c. 670,000 d. 680,000

8. The estimated payment to creditors:

a. 1,324,800 b. 1,308,000 c. 1,264,800 d. 1,237,800

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ACC16 AIR-01

PROBLEM 2: Alanis Dissolved Corporation filed a voluntary petition for bankruptcy in January 2014.
On 31 March 2014, the trustee provided the following information about the corporation’s financial

Assets Book Value Estimated Realizable Value

Cash 40,000.00 40,000.00
Accounts Receivable - net 200,000.00 150,000.00
Inventories 300,000.00 140,000.00
Plant assets - net 500,000.00 560,000.00
Total Assets 1,040,000.00

Liabilities for priority claims 160,000.00
Accounts payable - unsecured 300,000.00
Notes payable, secured by
Accounts Receivable 200,000.00
Mortgage Payable, secured by
all plant assets 440,000.00
Total Liabilities 1,100,000.00


1. The amount expected to be available for unsecured claims without priority (net free assets):
a. 300,000 b. 580,000 c. 140,000 d. 310,000
2. The expected recovery per peso of unsecured creditors:
a. .215 b. .223 c. .415 d. .400
3. The estimated payment to creditors:
a. 730,000 b. 45,000 c. 770,000 d. 890,000

PROBLEM 3: The following information is taken from the statement of affairs of the Kirsten

Asset pledge with fully secured creditors (current fair value, P166,000) 208,000.00
Asset pledge with partially secured creditors (current fair value, P112,000) 144,000.00
Free assets (current fair value, P104,000) 124,000.00
Liabilities with priority 26,000.00
Fully secured creditors 76,000.00
Partially secured creditors 136,000.00
Unsecured creditors 276,000.00


1. The estimated amount to be paid to fully secured creditors:

a. 76,000 b. 90,000 c. 166,000 d. 208,000
2. The estimated amount to be paid to unsecured creditors with priority:
a. 26,000 b. 20,000 c. 16,812 d. 14,560

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ACC16 AIR-01

3. The estimated payment to be paid to partially secured creditors:

a. 112,000 b. 125,440 c. 136,000 d. 144,000
4. The estimated payment to be paid to unsecured creditors without priority:
a. 154,480 b. 154,560 c. 194,000 d. 276,000

PROBLEM 4: The following information was available on 31 March 2014 for Austin Corporation,
which they cannot pay their liabilities when they are due:

Carrying Amounts
Cash 16,000.00
Trade accounts receivable (net): Current fair 184,000.00
value equal to carrying amount

Inventories: Net realizable value, P72,000; 156,000.00

pledge on P84,000 of notes payable
Plant assets: Current fair value, P269,600;
pledge on mortgage notes payable 536,000.00

Accumulated Depreciation of plant assets 108,000.00

Supplies: Current fair value, P6,000 8,000.00
Wages payable 23,200.00
Property taxes payable 4,800.00
Trade accounts payable 240,000.00
Notes payable, P84,000 secured by inventories 160,000.00
Mortgage payable, including accrued interest 201,600.00
of P1,600
Common stock, P5 par 400,000.00
Deficit (237,600.00)


1. The estimated losses on realization of assets:

a. 0 b. 84,000 c. 158,400 d. 244,400
2. The expected recovery percentage of unsecured creditors:
a. 75% b. 78% c. 88% d. 98%
3. The estimated deficiency to unsecured creditors:
a. 86,000 b. 82,000 c. 70,000 d. 54,000

Prof. Albert I. Rivera, CPA, MBA, CRA Page 5