SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

General Luna Road, Baguio City Philippines 2600

Telefax No.: (074) 442-3071Website: www.ubaguio.edu E-mail Address: ub@ubaguio.edu

REVIEW HANDOUTS AND MATERIALS

SEMESTER 1st SEMESTER SCHOOL YEAR 2019-2020

SUBJECT ADVANCED FINANCIAL ACCOUNTING AND REPORTING

HANDOUT # IMI - 003

TOPIC Corporate Liquidation

Basic Reports Prepared in Corporate Liquidation

1. Statement of Affairs. This statement is prepared as of a given
point in time for a business enterprise entering into the stage
of liquidation. The purpose of this statement is to display the
assets and liabilities and of the debtor enterprise from a
liquidation viewpoint, because liquidation is the outcome of the
bankruptcy proceedings. Thus, assets displayed in the statement
of affairs are value at current fair values; carrying amounts are
presented on a memorandum basis.
2. Statement of Realization and Liquidation. This is an activity
statement that is intended to show progress, i.e., actual
transactions toward the liquidation of a debtor’s estate. Its
original purpose is to inform bankruptcy court and interested
creditors of the accomplishments of the trustee.
The Statement of Realization and Liquidation differs from the
Statement of Affairs in the following respects:
1. The statement of realization and liquidation reports the
actual liquidation results. In contrast, the statement of
affairs is of a pro-forms nature and is based on estimates
rather than actual results.
2. The statement of realization and liquidation provides an
ongoing reporting of the trustee’s activities and is update
throughout the liquidating process. The statement of affairs
is a summary of the estimated results of a completed
liquidation.

For Discussion:
The PFRS are applicable only to entities which are of “going concern”.
Accordingly, the measurement bases prescribed in the Conceptual
Framework and in the PFRS do not apply to liquidating entities.
For entities undergoing liquidation, the appropriate measurement basis
is realizable value. For asset, realizable value is estimated selling
price less estimated cost to sell. For liabilities, realizable value
is the expected net settlement amount.
Formulas:
Estimated Deficiency = Assets at realizable value less Liabilities at
realizable
Estimated Recover percentage = Net free assets / Total Unsecured
without priority
Total assets at realizable values XX
Less: Unsecured creditors with priority (XX)
Fully secured creditors (XX)
Realizable value of asset pledged to partially (XX)
Secured Asset
Net Free Assets XX
Unsecured Creditors without priority XX
Plus: Deficiency of assets pledged to partially
secured XX
Total unsecured liabilities without priority XX

Debits
Assets to be realized, excluding
cash
Assets acquired
Liabilities liquidated
Liabilities not liquidated
Supplementary expenses
Loss
Creditors
Assets realized
Assets not realized
Liabilities to be liquidated
Liabilities assumed
Supplementary Income
Gain

I. The unsecured creditors of Clauie Corporation filed a petition

on July 1, 2019 to force Clauie Corporation into bankruptcy.
The court order for relief was granted on July 10 at which
time in interim trustee was appointed to supervise liquidation
of the estate. A listing of assets and liabilities of Insolve
Corporation as of July 10, 2019, along with estimated
realizable values, is a follows:

Assets Book Value Estimated

Realizable Values
Cash P61,400 P61,400
Accounts receivable 250,000 15% of the accounts
allowance for Bad (20,000) receivables is
debts estimated to be
uncollectible
Inventories 420,000 Estimated selling
price, P340,000
which will require
additional costs of
P50,000
Prepaid expenses 40,000 ?
Investments 180,000 110,000
Land 210,000 An offer of
Buildings (net) 260,000 P500,000 has been
received for land
and buildings
Machinery and 220,000 P53,900
equipment (net)
Goodwill 200,000 ?
Total Assets P1,821,400
Liabilities and
Equity
Accounts Payable P670,000
Wages Payable 3,400
Notes Payable 160,000
Accrued Interest- 5,000
notes
Mortgage payable, 400,000
secured by Land and
buildings
 Capital stock 800,000
Additional paid-in 80,000
capital
Deficit (297,000)
Total Liability & 1,821,400
Equity
Additional Information:
a. Patents completely written-off the books in past years but
with a realizable value of P10,000
b. The boos do not show the following accruals (unrecorded
expenses/additional liabilities)
Taxes………………………………..P16,400
Interest on mortgage………..10,000
c. The investment have been pledged as security for holder of
the notes payable.
d. The trustee fees and other cost of liquidation the estate
are estimated to be P60,000
Determine:
1. The total free assets should be:
a. P1,831,400 c. P717,800
b. 1,821,400 d. 638,000
2. The net free assets should be:
a. P717,800 c.P638,000
b. 698,000 d. 628,000
3. The estimated deficiency to unsecured creditors should be:
a. P87,000 c.P27,000
b. 47,800 d. 7,200
4. The expected recovery percentage of unsecured creditors
should be:
a. 96.00% c.88.00%
b. 95.00% d.86.62%
5. The estimated payment to creditors should be:
Fully Secured Partially With Without
Secured Priority Priority
a. P410,000 P110,000 P79,800 P638,000
b. 500,000 158,400 60,000 589,600
c. 410,000 165,000 79,800 670,000
d. 410,000 158,400 79,800 589,600

6. The estimated payment to creditors should be:

a. P1,324,800 c. P1,264,800
b. 1,308,000 d. 1,237,800

7. The estimated net gain or loss on assets realization should

be:
a. P583,600 c.P670,000
b. 593,600 d.680,000

Assets Secured liab Unsercured liab Free assets

Cash 61,400.00 61,400.00

A/R 212,500.00 212,500.00

Inventories 290,000.00 290,000.00

Prepaid expenses - -

Investments 110,000.00 110,000.00 55,000.00 -

Land and Building 500,000.00 410,000.00 90,000.00

Machinery and
Equipment 53,900.00 53,900.00
Goodwill - -

Patent 10,000.00 10,000.00

Total Free Assets 1,237,800.00 717,800.00 1.C

-
520,000.00 55,000.00 16,400.00 Taxes
-
60,000.00 Administrative
-
3,400.00 Salaries

Accounts Payable 670,000.00 638,000.00 2.C

725,000.00 87,000.00 3.A

638,000.00 0.88 4.C

5.A
6.D

1,821,400.00 1,237,800.00 583,600.00 7.A

II. Parcinic Dissolved Corporation filed a voluntary petition for

bankruptcy on January 2019. On March 31, 2019, the trustee
provided the following information about the corporation’s
financial affairs:

Assets: Book Value Estimated

Realizable Values
Cash P40,000 P40,000
Accounts Receivable 200,000 150,000
– net
Inventories 300,000 140,000
Plant assets – net 500,000 560,000
Total Assets 1,040,000

Liabilities:
Liabilities for P160,000
priority claims
Accounts payable- 300,000
unsecured
Notes Payable, 200,000
secured by Accounts
receivable
Mortgage payable 440,000
secured by all
plant assets
Total liabilities 1,100,000

1. The amount expected to be available for unsecured claims

without priority net free assets:
a. P300,000 c. P140,000
b. 580,000 d. 310,000

2. The expected recovery per peso of unsecured creditors:

a. P.215 c.P.415
b. .223 d..400

3. The estimated payment to creditors:

a. P730,000 c. P770,000
 b. 45,000 d.890,000

II.
Free
Assets Secured liab Unsercured liab assets
Cash 40,000 40,000
A/R 150,000 150,000 50,000 0
Inventories 140,000 140,000
Plant assets 560,000 440,000 120,000
Total Free Assets 300,000
Priority
Total 890,000 590,000 50,000 -160000 claims
Net Free assets 140,000 1.C
Accounts Payable 300,000
350,000 0.4 2.D
III. 730,000 3.A

III. The following information was available on March 31, 2019 for
Bankrupt Corporation, which they cannot pay their liabilities
when they are due:

Carrying Amounts
Cash P16,000
Trade accounts receivable 184,000
(net): Current fair value
equal to carrying amount
Inventories: Net realizable 156,000
value, P72,000; pledged on
notes payable
Plant assets: Current fair 536,000
value, P269,600; pledged on
mortgage payable
Accumulated depreciation of 108,000
plant assets
Supplies: Current fair value, 8,000
P6,000
Wages payable, all earned 23,200
during March
Property taxes payable 4,800
Trade accounts payable 240,000
Notes payable, P84,000 secured 160,000
by Inventories
Mortgage payable, including 201,600
accrued interest of P1,600
Common stock, P5 par 400,000
Deficit 237,600

Determine:
1. The estimated losses on realization of assets:
a. P 0 c. P158,400
b. 84,000 d. 244,400
2. The estimated gains on realization of assets:
a. P0 c. P158,400
b. 84,000 d. 244,400
3. The expected recovery percentage of unsecured creditors:
a. 75% c. 78%
b. 68% d. 98%
4. The estimated deficiency to unsecured creditors:
 a. P86,000 c.P 70,000
b. 82,000 d. 54,000

Assets Secured liab Unsercured liab Free assets

Cash 16,000 16,000
Trade A/R 184,000 184,000
inventories 72,000 72,000 76000 0
Plant Assets 269,600 201600 68,000
Supplies 6,000 6,000
547,600 273,600 76,000 274,000
Book value 792000 -23200 Wages
1.D 244,400 -4800 Taxes
2.A
246,000
Trade AP 240,000 70,000 C
316,000 0.77848101 C

IV. The Liquid Company had a very unstable financial condition

caused by a Deficiency of liquid assets. On February 4, 2019,
The following information was available:

Cash P112,00
Assets Not Realized:
Accounts Receivable 80,000
Merchandise inventory 160,000
Investment in common 26,400
stock
Land 100,000
Buildings 60,000
Machinery and equipment 48,000

Liabilities Not Liquidated:

Notes Payable P244,000
Accounts Payable 288,000
Salaries and Wages 40,000
payable
Taxes payable 180,000
Estate deficit (173,600)

During the six-month period ending July 31, 2019, the trustee
sold the Investment in Common Stock for P26,000, realized P84,000 for
the accounts receivable, sold the merchandise for P152,000, and paid-
off P26,000 of the bank loan and all liabilities with priorities
(salaries, and wages payable taxes payable) as well as P7,440 for
estate administration expenses.
Determine:
1. The estate deficit, ending ( July 31, 2019) should be:
a. P161,760 c. P185,440
b. P178,000 d. P189,440

2. The net (gain) loss or realization and liquidation should be:

a. P11,840 loss c. P15,840 loss
b. P1,840 gain d.P4,400 loss

3. The cash balance , ending (July 31, 2019) should be:

 a. Zero c. P188,000
b. P185,440 d. 292,560

Assets to be Realized Assets Realized

A/R 80,000 Investment in C/S 26,000
MI 160,000 A/R 84,000
Investment in C/S 26,400 MI 152,000
Land 100,000
Bldgs. 60,000
Machinery and Eq. 48,000
Assets Not Realized
Land 100,000
Bldgs. 60,000
Machinery and
Assets Acquired: Eq. 48,000
None 0
Liabilities Liquidated Liabilities to be liquidated
Bank Loan 26,000 Notes Payable 244,000
Salaries and Wages 40,000 Accounts Payable 288,000
Salaries and
Taxes Payable 8,000 Wages 40,000
Taxes Payable 8,000
Liabilities not Liquidated Bank Loans 180,000
Notes Payable 244,000
Accounts Payable 288,000
Bank Loans 154,000

Administrative Exp. 7,440

Total 1,241,840 1,230,000

11,840 2.A
Beg. Deficit 173,600
185,440 1.C

Beg. Cash 112,000

Realized assets 262,000
Liquidated Liab -74,000
Administrative
exp -7,440
Ending Cash 292,560 3.D

V. Bacolod Company is experiencing financial problems which

resulted to ultimate bankruptcy. The statement of financial
position of the entity before liquidation is presented below:

Cash 200,000 Income tax 400,000

payable
Inventory 600,000 Salaries 600,000
payable
Land 400,000 Note payable 1,600,000
Mortgage 200,000
payable
Accounts 800,000
payable
Contributed 1,000,000
capital
Deficit (3,400,000)

 The note payable is secured by the inventory with net

realizable value of P500,000.
  The mortgage payable is secured by the land with fair value
of P240,000.
1. What is the amount received by the holder of the note
payable at the end of corporate liquidation?
A. 640,000
B. 600,000
C. 500,000
D. 520,000
2. What is the amount received by the holder of the mortgage
payable at the end of corporate liquidation?
A. 240,000
B. 400,000
C. 300,000
D. 200,000

3. What is the amount received by the employees at the end of

corporate liquidation concerning their salaries?
A. 200,000
B. 240,000
C. 144,000
D. 600,000

Free
Assets Secured liab Unsercured liab assets
Cash 200,000 200,000
Inventory 500,000 500,000 1100000 0
Land 240,000 200,000 40,000
Income
-400,000 tax
-600,000 Salaries
0 ex
C -760,000
D
B