Chapter 5

1
AA2 - CHAPTER 5
SUGGESTED ANSWERS
EXERCISES
Exercise 5 - 1
1. Property, Plant and Equipment 2,250,000

Revaluation Surplus 2,250,000
2. Revaluation Surplus 800,000

Retained Earnings 800,000
Exercise 5 - 2
Books of Contina Co.

Note Payable 3,000,000
Interest Payable 300,000
Cash 120,000
Land 1,200,000
Gain on Transfer of Land 600,000
Gain on Extinguishment of Liability 1,380,000
Books of Maunlad Bank

Cash 120,000
Land 1,800,000
Bad Debts Expense 1,380,000
Note Receivable 3,000,000
Interest Receivable 300,000
Exercise 5 - 3
Books of Walana Co.

Note Payable 8,000,000
Ordinary Share Capital (40,000 sh @ P50) 2,000,000
Preference Share Capital (20,000 sh @ P100) 2,000,000
Ordinary Share Premium (40,000 sh @P30) 1,200,000
Preference Share Premium (20,000 sh @ P20) 400,000
Books of Masagana Corp.

Investment in Equity Securities – Ordinary Shares 3,200,000
Investment in Equity Securities – Preference Shares 2,400,000
Note Receivable 8,000,000
Exercise 5 - 4
Chapter 5 – AA2 (2014 edition) page 2
Carrying value of the obligation:

Face value P7,500,000
Unamortized premium 210,000
Accrued interest 750,000
Total P8,460,000
NOTE: the bonds will be due Dec. 31, 2018
Books Peligro Co. (debtor)
1. no entry
Total future cash payments:
Interest (P7,500,000 x 5% x 5 years) 1,875,000
Total P9,375,000
Total future cash payments is greater than carrying value; hence no entry.
2. Bonds Payable 7,500,000

Premium on Bonds Payable 210,000
Restructured Obligation 6,750,000

Total P6,750,000
Carrying value of obligation 8,460,000
Gain on extinguishment of liability P1,710,000
3. Bonds Payable 7,500,000

Premium on Bonds Payable 210,000

Total P7,150,000
Books of Creditor
1. Bad Debts Expense 2,355,431

Allowance for Uncollectible Accounts 1,605,431
PV of principal payment at historical rate of 10%

(P7,500,000 x .6209) P4,656,750
PV of interest payment at historical rate of 10%.
(P7,500,000 x 2.5% = P187,500 x 7,7217) 1,447,819
Total P6,104,569
Carrying value of receivable 8,460,000
Loss / bad debts expense P2,355,431
2 Bad Debts Expense 3,928,567


(P4,500,000 x .6209) P2,794,050
(P4,500,000 x 5% = P225,000 x 7,7217) 1,737,383
Total P4,531,433
3. Bad Debts Expense 3,770,970


(P5,500,000 x .6209) P3,414,950
(P5,500,000 x 3% = P165,000 x 7,7217) 1,274,080
Total P4,689,030
Exercise 5 - 5
Book Appraised Est. Amount Loss (Gain) on

Value Assets Value Available Realization
Free assets:
P44,000 Finished goods P49,000 P49,000 (P 5,000)
33,000 Work in process:
Est. value upon completion P70,000
Costs to complete:
Materials (10,000)
labor and other costs (17,000) 43,000 43,000 (10,000)
40,000 Materials
Required to complete WIP P10,000
Balance, est. to realize 27,000 37,000 37,000 3,000
Exercise 5 - 6
When there are mutual debts between a bankrupt and a creditor, one balance is set off against the other and
only the difference is recognized for purpose of settlement. Therefore:
(1) Under the heading "Unsecured Creditors", the cash in the savings account with AB Bank,
P70,000, will be applied against the cash overdraft in the checking account with AB Bank,
P90,000, and the overdraft excess of P20,000 will be extended to the "Amount Unsecured"
column;
(2) Under the heading "Free Assets", the cash overdraft in the checking account with CD
Bank, P30,000, will be applied against the cash balance representing sinking fund
accumulation with CD Bank, P330,000, and the sinking fund excess of P300,000 will be
extended to the "Estimated Amount Available" column.
Book values of the asset and liability items would be listed in the "Book Value" columns within the sections
indicated above, with subtraction items being reported as negative balances in the "Book Value" columns.
Exercise 5 - 7
Book Appraised Est. Amount Loss (Gain) on

Assets pledged with fully secured creditors:
P20,000 (a) Mercury stock (200 shares) P22,000 (P 2,000)
Less Claim (see contra) 21,000 P 1,000
Assets pledged with partly secured creditors:

90,000 (d) Accounts receivable (deducted contra) 40,000 50,000
Free assets:
40,000 (a) Mercury stock (400 shares) P22,000 22,000 ( 2,000)
40,000 (b) Work in process:
Materials ( 1,000)
Labor ( 4,000) 31,000 31,000 9,000
24,000 (c ) Materials
Required to complete WIP P 1,000
Balance, est. to realize 25,000 26,000 26,000 ( 2,000)
Book Amount
Value Liabilities and Stockholders' Equity Unsecured
P21,000 Fully secured creditors:
Claims (deducted contra) P21,000
Partly secured creditors:

45,000 Notes payable P45,000
Less security: Accounts receivable (see contra) 40,000 P 5,000
Exercise 5 - 8
Cameron Company, Debtor
Deficiency Statement
Estimated losses on realization of assets:

Accounts receivable P13,200
Inventories 48,000
Prepaid insurance and other prepaid expenses 1,200
Machinery and equipment 40,000
Goodwill and patents 90,000 P192,400
Additional liabilities:
Liquidation costs P10,000
Contingent liabilities 15,000 25,000
Estimated gross loss P217,400
Deduct:
Estimated gains on realization of assets:
Land and buildings 45,000
Estimated net loss P172,400
Loss to be borne by owners:
Capital stock P200,000
Less deficit 31,000 169,000
Estimated deficiency to unsecured creditors P 3,400
Exercise 5- 9
Clippers Company, Debtor
Statement of Affairs
November 30, 2014
Creditors
With Fully Partly
Liabilities Priority Secured Secured Unsecured
Mortgage payable P200,000
Notes payable P 80,000 P 20,000

Liabilities with priority P 30,000
Unsecured liabilities 210,000
Totals P 30,000 P200,000 P 80,000 P230,000
Assets Available to Creditors

With Fully Partly
Assets Priority Secured Secured Unsecured
Land and buildings P200,000 P120,000
Furniture and equipment P 80,000
Other assets 90,000
Creditors with priority ( 30,000)
Totals P 30,000 P200,000 P 80,000 P180,000
Total unsecured creditors P230,000

Estimated amount available to unsecured creditors without priority 180,000
Estimated amount payable per peso of unsecured liability (P180,000/P230,000) P .78
PROBLEMS
Problem 5 -1
1.
Books of Mahina Co.
Mortgage Note Payable 6,000,000
Land 2,500,000
Gain on Transfer of Land 2,250,000
Books of Malakas Corp.

Land 4,750,000
Mortgage Note Receivable 6,000,000
2.
Books of Mahina Co.
Ordinary Share Capital 2,000,000
Ordinary Share Premium 2,500,000

Investment in Equity Securities 4,500,000
Mortgage Note Receivable 6,000,000
3.
Books of Mahina Co.
No entry

PV of principal payment
(P6,000,000 x .7513) P4,507,800
CV of receivable 6,000,000
Bad debts expense P1,492,200
4.
Books of Mahina Co.

Interest (P4,000,000 x 6% x 3 years) 720,000
Total P4,720,000


(P4,000,000 x .7513) P3,005,200
PV of interest payment at historical rate of 10%
(P4,000,000 x 6% = P240,000 x 2.4869( 621,725
Total PV P3,626,925
CV of receivable 6,000,000
Bad debts expense P2,373,075
Problem 5 -2
Broadway
Statement
January
Estimated Loss (Gain)
Book Appraised Amount on
P60,000 Merchandise inventory P 42,000 P 18,,000
Less Claim: Note payable and accrued interest
(see contra) 40,400 P 1,600
36,000 Delivery equipment (deducted contra) P 28,000 8,000

Free assets:
9,700 Cash 9,700 9,700
41,000 Notes receivable and accrued interest 26,800 26,800 14,200
87,000 Accounts receivable 75,000 75,000 12,000
20,000 Merchandise inventory 14,000 14,000 6,000
8,000 Furniture and fixtures 9,000 9,000 (1,000)
50,000 Goodwill 0 0 50,000
1,000 Prepaid insurance 0 0 1,000
P 108,200
Estimated amount available P136,100
Creditors with priority (see contra) 12,800
Estimated amount available to unsecured creditors
without priority (approximately P.71 on the peso) P123,300
Estimated deficiency to unsecured creditors 49,900
P312,700 P173,200
Company
of Affairs
31, 2014
Book Amount
Creditors with priority:
Estimated liquidation expenses P12,000
P 800 Accrued salaries and wages 800
Total (deducted contra) P12,800
Fully secured creditors:
400 Add Accrued interest on notes payable 400

900 Add Accrued interest on notes payable 900
Total P30,900
Less security; Delivery equipment (see contra) 28,000 P 2,900
Unsecured creditors:
300 Add accrued interest on notes payable 300 30,300
136,000 Accounts payable 136,000
Notes receivable discounted 4,000
Shareholders' equity:
100,000 Share capital
10,000 Premium on share capital
(35,700) Deficit
P312,700 Total unsecured liabilities P173,200
Problem 5 – 2 – Req. 2
Broadway Company, Debtor

January 31, 2014

Merchandise inventory P 24,000
Delivery equipment 8,000
Notes receivable and accrued interest 14,200
Accounts receivable 12,000
Goodwill 50,000
Prepaid insurance 1,000 P109,200
Estimated liquidation expenses P 12,000
Notes receivable discounted 4,000 16,000

Deduct:
Furniture and fixtures 1,000
Share capital P100,000
Premium on share capital 10,000
P110,000
Less deficit 35,700 74,300
Problem 5-3 (Req. 1)

Crooked
Statement
July
P60,000 Land P140,000 P20,000
100,000 Buildings
Less claim: First mortgage bonds and accrued
interest (see contra) 123,000 P17,000
42,000 Finished goods (deducted contra) P 36,000 6,000
Free assets:
8,100 Cash 8,100 8,100

42,000 Finished goods 36,000 36,000 6,000
70,000 Work in process:
Less cost to complete 30,000 50,000 50,000 20,000
40,000 Materials 28,000 28,000 12,000
40,000 Patterns, jigs, and tools 8,000 8,000 32,000
70,000 Machinery and equipment 16,000 16,000 54,000
2 Intangibles 5,000 5,000 ( 4,998)
2,000 Prepaid insurance 0 0 2,000
P153,002
Estimated amount available to unsecured creditors _______
without
priority (approximately P0.75 on the peso) P207,600
_______ Estimated deficiency to unsecured creditors 68,200
P553,102 P275,800
Company
of Affairs
1, 2014
Book Amount
P 7,700 Accrued wages 8,500
Total (deducted contra) P 33,500
120,000 First mortgage bonds P120,000
3,000 Add Accrued interest on mortgage bonds 3,000
50,000 Notes payable P 50,000
1,200 Add Accrued interest on notes payable 1,200
P 51,200
Less security: Finished goods (see contra) 36,000 P 15,200
3.600 Accrued interest on notes 3,600 80,600
Shareholders" equity:
31,000 Additional paid-in capital
(120,398) Deficit
_______ _______
Problem 5–3 (Req. 2)
Crooked Company
July 1, 2014

Land and buildings P 20,000
Finished goods 12,000
Accounts receivable 6,000
Work in process 20,000
Materials 6,000
Patterns, jigs, and tools 32,000
Prepaid insurance 2,000 P158,000
Estimated liquidation expenses P25,000
Accrued wages 800 25,800
Deduct:
Intangibles 4,998

Additional paid-in capital 31,000
P231,000
Less Deficit 120,398 110,602
Problem 5 – 3 (Req. 3)
Crooked Company
Summary of Estimated Payments to Creditors
July 1, 2014
Percentage Amount to
Payment Claim be Paid
Estimated liquidation expenses 100% P 25,000 P 25,000
Accrued wages 100 8,500 8,500
P 33,500
First mortgage bond 100% P120,000 P120,000
Accrued interest on bonds 100 3,000 3,000
P123,000
Notes payable ----- P 50,000 --------
Accrued interest on notes payable ----- 1,200 --------
P 51,200
Secured 100% 36,000 P 36,000
Unsecured 75 P 15,200 11,400
P 47,400
Notes payable 75% P 77,000 P 57,750
Accrued interest on notes payable 75 3,600 2,700
Accounts payable 75 180,000 135,000
P195,450
Note relative to "Summary of Estimated Payments to Creditors": Estimated payment on the unsecured
portion of the notes of P11,400, and on the remaining unsecured liabilities, P195,450, results in a total of
206,850, which is p750 less than the estimated amount to become available to unsecured creditors as
reported by the statement of affairs. The discrepancy emerges because the estimated amount available as
determined by the statement is actually slightly more than the 75% figure and the resulting discrepancy is
not objectionable, however, in view of the fact that the data are presented as estimates and a refinement of
such data would suggest a degree of accuracy that is not attainable.
Problem 5 - 4
Payless
Statement
June
P 80,000 Accounts receivable P 80,000
Less claim; Notes payable (see contra) 60,000 P20,000
26,000 Land P 50,000 (P 24,000)
180,000 Buildings 200,000 ( 40,000)
240,000 Machinery 150,000 90,000
Total P420,000
Less claim: Mortg.and accrued int. (see contra) 264,800 155,200

40,000 Marketable securities P 38,000 2,000
Accrued interest 400 ( 400)
Free assets:
4,000 Cash P 3,000 3,000 1,000
60,000 Accounts receivable P60,000
Add credit balance (see contra) 10,000 70,000 70,000
120,000 Finished goods 100,000 100,000 20,000
80,000 Materials, expected to be realized as
finished goods P140,000
Less cost to complete 20,000 120,000 120,000 ( 40,000)
40,000 Goodwill 0 40,000
10,000 Prepaid expenses 0 ______ 10,000
P 58,600
Creditors with priority 83,000
Estimated amount available to unsecured creditors P385,200
w/o priority
P880,000 P421,600
(2) Estimated settlement per peso of unsecured liabilities: estimated amount available, P385,200,
divided by total unsecured liabilities, P421,600, 91% or P0.91 on the peso.
Corporation
of Affairs
30, 2014
Book Amount
P 30,000 Withheld taxes payable P 30,000
Employer payroll taxes payable 1,000
30,000 Accrued wages 30,000
Estimated liquidation expenses 20,000
Auditor's fee for liquidation work 2,000

60,000 Notes payable (deducted contra) P 60,000
260,000 Mortgages payable P260,000
Add Accrued interest 4,800

Less security: Marketable securities and accrued interest

(see contra) 38,400 P 1,600
170,000 Notes payable 170,000
Accounts receivable (credit balances) 10,000
Unbilled auditor's fee 10,000
Estimated liability on pending damage suit 100,000
(40,000) Retained earnings (deficit)
_______ _______
_
P880,000 Total unsecured liabilities P421.600
Problem 5 – 5
Mackintosh
Statement
November
P105,000 Land P250,000 (P 15,000)
130,000 Buildings
Less claim, mort. payable, and accrued interest
(see contra) 205,000 P 45,000
90,000 Investments (deducted contra) 55,000 35,000
Free assets:
31,500 Cash 31,500 31,500
230,000 Inventories 145,000 145,000 85,000
110,000 Machinery and equipment (net) 30,000 30,000 80,000
100,000 Goodwill 0 0 100,000
303,750
Estimated amount available to unsecured creditors P322,050

w/o priority
P921,500 P362,500
(2) Estimated amount available, P322,050, divided by total unsecured liabilities, P362,500, equals
estimated amount payable on claims, 89% or 89 centavos on the dollar.
Company
of Affairs
01, 2014
Book Amount
Taxes payable 4,000
Wages payable 1,700
P200,000 Mortgage payable P200,000
Add Accrued interest 5,000
Add accrued interest 2,500
Total P 82,500
Less security: Investments (see contra) 57,000 P 27,500
50,000 Additional paid-in capital

(143,500) Retained earnings (deficit)
CORRECTION: Additional paid-in capital is P50,000 instead of P40,000.
2.
Mackintosh Company
November 1, 2014

Accounts receivable P 18,750
Inventories 85,000
Investments 35,000
Goodwill 100,000 P318,750
Taxes payable 4,000
Wages payable 1,700
Accrued interest on notes payable 2,500
Accrued interest on mortgage 5,000 43,200
Deduct:
Land and buildings 15,000
Additional paid-in capital 50,000
P450,000
Less deficit 143,500 306,500

Chapter 5

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1

1. Property, Plant and Equipment 2,250,000

2. Revaluation Surplus 800,000

Books of Contina Co.

Books of Maunlad Bank

Books of Walana Co.

Books of Masagana Corp.

Carrying value of the obligation:

NOTE: the bonds will be due Dec. 31, 2018

Books Peligro Co. (debtor)

2. Bonds Payable 7,500,000

Total future cash payments:

3. Bonds Payable 7,500,000

Total future cash payments:

1. Bad Debts Expense 2,355,431

PV of principal payment at historical rate of 10%

2 Bad Debts Expense 3,928,567

PV of principal payment at historical rate of 10%

3. Bad Debts Expense 3,770,970

PV of principal payment at historical rate of 10%

Book Appraised Est. Amount Loss (Gain) on

Book Appraised Est. Amount Loss (Gain) on

Assets pledged with partly secured creditors:

Partly secured creditors:

Estimated losses on realization of assets:

Notes payable P 80,000 P 20,000

Assets Available to Creditors

Total unsecured creditors P230,000

Books of Malakas Corp.

Books of Malakas Corp.

Books of Malakas Corp.

Total future cash payments:

Books of Malakas Corp.

Bad Debts Expense 2,373,075

PV of principal payment at historical rate of 10%

36,000 Delivery equipment (deducted contra) P 28,000 8,000

400 Add Accrued interest on notes payable 400

Broadway Company, Debtor

Estimated losses on realization of assets:

Notes receivable discounted 4,000 16,000

Problem 5-3 (Req. 1)

79,000 Accounts receivable 73,000 73,000 6,000

Problem 5–3 (Req. 2)

Estimated losses on realization of assets:

Accrued wages 800 25,800

Estimated gross loss P183,800

Estimated net loss P178,802

Loss to be borne by owners:

Estimated deficiency to unsecured creditors P 68,200

Assets pledged with partly secured creditors:

Fully secured creditors:

Partly secured creditors:

Less security: Marketable securities and accrued interest

Estimated amount available to unsecured creditors P322,050

50,000 Additional paid-in capital

CORRECTION: Additional paid-in capital is P50,000 instead of P40,000.

Estimated losses on realization of assets:

Estimated deficiency to unsecured creditors P 40,450

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