CHAPTER 5 - PROBLEM 1: TRUE OR FALSE

Use the following information for items 1 to 5:

Foot Corp. has total assets of P100 and total liabilities of P150. The assets are expected to be realized at an averag
90% of carrying amount. The expected net settlement amount of the liabilities is equal to the carrying amount.
Of the total liabilities, P60 represent secured and priority claims.

1. The "net free assets" are P40.

Answer: -
Total net assets: (at realizable value) 90
Less: Liabilities (secured and priority) (60)
Free assets 30

2. Unsecured non-priority creditors would expect to recover only one-third (1/3) of their claim.

Answer: 1.00
Free assets 30
Divided by: (Unsecured and without priority claims 90
Estimated recovery percentage of unsecured credit 33%

3. Mr. A has a P30 loan receivable from Foot Corp. The loan is secured by an asset with a
carrying amount of P40. Mr. A can expect payment of P21 on the loan.

Answer: -
Mr. A's claim is a fully secured liability. Hence, he can recover a 100% of his
amount receivable from the liquidating entity.

4. Mr. B has a P15 note receivable from Foot Corp. The note is secured by an asset with a
carrying amount of P10. Mr. B can expect payment of P11 on the note.

Answer: 1.00
Receivable amount of Mr. B ###
Less: Secured asset value ###
Unsecured claims 5
Multiply by: Estimated recovery percentage of unse 33%
Recoverable amount of Mr. B's usecured claim 1.67
Add: Fully secured claim 10.00
Total expected collection of Mr. B 11.67
5. You are a major shareholder of Foot Corp. You own 70 out of the 100 outstanding ordinary
shares with P1 par value per share. You can expect to recover nothing on the liquidation of
Foot Corp.

Answer: 1.00
It is evident that the shareholders (inside creditors) will not receive
any settlement claims of their investments from the liquidating company
as it is apparent that even third parties (creditors) cannot be paid in full.
 e expected to be realized at an average of
es is equal to the carrying amount.

(100 x 90%)

rd (1/3) of their claim.

(solution in previous item)

(150 - 60)

an asset with a

bility. Hence, he can recover a 100% of his

dating entity.

y an asset with a
outstanding ordinary
on the liquidation of

(inside creditors) will not receive

estments from the liquidating company
arties (creditors) cannot be paid in full.
CHAPTER 5 - PROBLEM 2: MULTIPLE CHOICE: THEORY

1. Which of the following is not a correct classification of assets in the statement of affairs?
a. Assets pledged to fully secured creditors
b. Assets pledged to partially secured creditors
c. Free assets
d. Current assets

Answer: D. Page 157 - 159

2. In the statement of affairs, assets are measured at

a. realizable value.
b. fair value.
c. book value.
d. mixture of costs and values.

Answer: A. Page 157

3. It is the initial report prepared at the start of the liquidation process.

a. Statement of affairs
b. Statement of realization and liquidation
c. Statement of corporate liquidation and reorganization
d. Statement of love affairs

Answer: B. Page 166

4. The estimated deficiency to unsecured creditors without priority is computed as:

a. net free assets less total usecured liabilities without priority.
b. net free assets divided by total usecured liabilities without priority.
c. total assets at realizable values less total liabilities at expected net settlement amounts.
d. a or c.

Answer: A. Page 163

5. ABC Co. has filed a petition for bankruptcy. ABC will not liquidate but will be administered
by another party appointed by a court of law over the next 10 years. Which of the following
best describes this event?
a. Troubled debt restructuring
b. Quasi-reorganization
c. Recapitalization
d. Corporate rehabilitation

Answer: D. Page 186.

CHAPTER 5 - PROBLEM 3: EXERCISE

Big Co.'s financial position prior to liquidation is as follows:

ASSETS LIABILITIES AND EQUITY
Cash 80,000 Accrued expenses
Accounts receiva 440,000 Current tax payable
Note receivable 200,000 Accounts payable
Inventory 1,060,000 Note payable
Prepaid assets 20,000 Loan payable
Land 1,000,000 Share capital
Building, net 4,000,000 Retained earnings (defici
Equipment, net 600,000
Total assets 7,400,000 Total liabilities and equit

Additional information:
a. 24% of the accounts receivable is uncollectible.
b. The note is fully collectible. In addition, P20,000 interest is expected to be received.
c. The inventory's estimated selling price and costs to sell are P840,000 and P20,000,
respectively.
d. The prepaid assets are non-refundable.
e. The land and building, which are pledged as securities for the P4,000,000 loan, are
expected to be sold at a package price of P5,200,000. An additional P30,000 is expected
to be paid for the interest on the loan.
f. The equipment, which has a net selling price of P400,000, is pledged as security for the
note payable.
g. Administrative expenses P60,000 are expected to be incurred in the liquidation process.
h. The accrued expenses include salaries payable of P50,000.
i. The other liabilities are expected to be settled equal to their carrying amounts.

Requirements:
1. Prepare the statement of affairs.

2. Compute for the estimated deficiency.

3. Compute for the estimated recovery percentage of unsecured creditors

without priority.

4. Mr. A, a supplier, has an outstanding account receivable of P500,000 from Big Co.
How much can Mr. A expect to recover from his claim?

STEP 1: Restate the assets and liabilities

Book values Adjustments

 ASSETS
Cash 80,000
Accounts receiva 440,000 (105,600)
Note receivable 200,000
Interest receivab - 20,000
Inventory 1,060,000 (240,000)
Prepaid assets 20,000 (20,000)
Land 1,000,000 200,000
Building, net 4,000,000
Equipment, net 600,000 (200,000)
Total assets 7,400,000 (345,600)

LIABILITIES AND EQUITY

Accrued expenses 442,000
Current tax payable 700,000
Accounts payable 2,000,000
Note payable 600,000
Loan payable 4,000,000
Interest payable - 30,000
Estimated admin expen - 60,000
7,742,000 90,000

Share capital 1,000,000

Retained earnings (defi (1,342,000) (435,600)
Total liabilities and equ 7,400,000 (345,600)
###

STEP 2: Identify the classifications of the assets and liabilities

ASSETS
Realizable
value
Assets pledged to fully secured creditors:
Land 1,200,000
Building, net 4,000,000
Less: Loan payable (4,000,000)
Interest payable (30,000)

Assets pledged to partially secured creditors:

Equipment, net 400,000
Less: Note payable (600,000)

Free assets:
Cash 80,000
 Accounts receivable 334,400
Note receivable 200,000
Interest receivable 20,000
Inventory 820,000

Total free assets

LIABILITIES
Secured and
Priority claims
Unsecured liabilities with priority:
Estimated admin expense 60,000
Current tax payable 700,000
Salaries payable 50,000
Total unsecured liabilities with prior 810,000

Fully secured creditors:

Loan payable 4,000,000
Interest payable 30,000
4,030,000

Partially secured creditors:

Note payable 600,000
Less: Equipment (400,000)

Unsecured liabilities without priority:

Accrued expenses (exc. Salaries pay 392,000
Accounts payable 2,000,000

Total Unsecured liabilities without priority

Step 3: Estimated recovery percentage of unsecured creditors without priority

Estimated recovery percentage of Net free assets

=
unsecured creditors without priority Total Unsecured liabilities without priority

Net free assets:

Total free assets
Less: Unsecured liabilities with priority
Total net free assets

Estimated recovery percentage of 1,814,400

=
unsecured creditors without priority
 Estimated recovery percentage of =
unsecured creditors without priority 2,592,000

3. Estimated recovery percentage of = 70%

unsecured creditors without priority

STEP 4: Statement of affiars - number 1 Requirement

Big Co.
Statement of affairs
(Date)
Book Realizable
values ASSETS value

Assets pledged to fully secured creditors:

1,000,000 Land 1,200,000
4,000,000 Building, net 4,000,000
Less: Loan payable (4,000,000)
Interest payable (30,000)

Assets pledged to partially secured creditors:

600,000 Equipment, net 400,000
Less: Note payable (600,000)

Free assets:
80,000 Cash 80,000
440,000 Accounts receivable 334,400
200,000 Note receivable 200,000
- Interest receivable 20,000
1,060,000 Inventory 820,000
20,000 Prepaid assets -
Total free assets
Less: Unsecured liabilities with priority
Net free assets
Estimated defciency
7,400,000

Book LIABILITIES Realizable

values AND EQUITY value

Unsecured liabilities with priority:

- Estimated admin expense 60,000
700,000 Current tax payable 700,000
50,000 Salaries payable 50,000
 Total 810,000

Fully secured creditors:

4,000,000 Loan payable 4,000,000###
- Interest payable 30,000###
Total 4,030,000###

Partially secured creditors:

600,000 Note payable 600,000
Less: Equipment (400,000)

Unsecured liabilities without priority:

392,000 Accrued expenses (exc. Sal 392,000
2,000,000 Accounts payable 2,000,000
Total Unsecured liabilities without priority

(342,000) Shareholder's equity

7,400,000

4. Requirement

Mr. A claims 500,000

Multiply: Estimated recovery percentage
of unsecured creditors without 70%
Recoverable amount 350,000
AND EQUITY
442,000
700,000
2,000,000
600,000
4,000,000
1,000,000
(1,342,000)

7,400,000

ected to be received.
40,000 and P20,000,

4,000,000 loan, are

onal P30,000 is expected

edged as security for the

n the liquidation process.

rrying amounts.

0,000 from Big Co.

Realizable value
 80,000
334,400
200,000
20,000
820,000
-
1,200,000
Total value of P5,200,000
4,000,000
400,000
7,054,400

442,000
700,000
2,000,000
600,000
4,000,000
30,000
60,000
7,832,000

1,000,000
(1,777,600)
7,054,400

Available for
unsecured creditors

1,170,000

-
 1,454,400

2,624,400

Unsecured liabilities
without priority

200,000

2,392,000

2,592,000

Net free assets

cured liabilities without priority

2,624,400
(810,000)
1,814,400
 Available for
unsecured creditors

1,170,000

1,454,400
2,624,400
(810,000)
1,814,400
(777,600) 2. answer (squeeze or refer formula)
2,592,000

Unsecured liabilities
without priority
 200,000

2,392,000
2,592,000

-
2,592,000
CHAPTER 5 - PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL
Use the following information for the next four questions:
Sunday Co.'s financial position before the start of its liquidation is as follows:
ASSETS LIABILITIES AND EQUITY
Cash 100,000 Accounts payable
Accounts receivable 600,000 Income tax payable
Inventory 1,560,000 Note payable
Land 800,000 Loan payable
Building 1,200,000 Share capital
Equipment, net 400,000 Retained earnings (deficit)
Total assets 4,660,000 Total liabilities and equity

Additional information:
• Only 60% of the accounts receivable is collectible.
• The entire inventory is expected to be sold half the price.
• The land and building are expected to be sold at a lump sum price of P2,300,000.
• The equipment is expected to be sold at its carrying amount but after refurbishment costs of P70,000.
• Certain accounts payable are measured gross of P23,000 cash discount which Sunday intends to take.
A supplier waived repayment of a P420,000 account.
• The taxing authority gave Sunday a six-month tax amnesty to settle the tax liability for P780,000.
• Interests of P80,000 and P70,000 are expected to be paid on the note and loan, respectively.
• Liquidation costs of P120,000 are expected to be incurred.
• SSS, Philhealth, and Pag-ibig contributions of P160,000, not reflected on the balance sheet above,
are expected to be paid.

1. How much is the estimated deficiency to unsecured creditors without priority?

a. 567,000
b. 697,000
c. 767,000
d. 817,000

Answer: B

Book values Adjustments

ASSETS
Cash 100,000 -
Accounts receivable 600,000 (240,000)
Inventory 1,560,000 (780,000)
Land 800,000 300,000
Building 1,200,000
Equipment, net 400,000 (70,000)
Total assets 4,660,000 (790,000)

Book values Adjustments

 LIABILITIES AND EQUITY
Accounts payable 1,600,000 (443,000)
Government remittance - 160,000
Income tax payable 900,000 (120,000)
Note payable 1,000,000
Interest payable - Note - 80,000
Loan payable 1,200,000
Interest payable - Loan - 70,000
Estimated liquidation e - 120,000
4,700,000 (133,000)

Share capital 2,000,000

Retained earnings (defic (2,040,000) (657,000)
4,660,000 (790,000)

Estimated defciency
Share capital
Retained earnings (deficit)
Estimated defciency

2. How much are the net free assets?

a. 1,210,000
b. 1,570,000
c. 1,907,000
d. 2,270,000

Answer: A

Total net realizable assets

Less:
Unsecured liabilities with priority:
Income tax payable 780,000
Government remittances 160,000
Estimated liquidation expenses 120,000
Fully secured creditors:
Loan payable 1,200,000
Interest payable - Loan 70,000
Assets pledged to partially secured creditors:
Note payable 330,000

Total net free assets

3. How much total amount can the issuer of the note payable expect to receive?
a. 693,018
b. 729,078
c. 805,875
d. 908,127

Answer: C

Total settlement obligation

Less:
Unsecured liabilities with priority:
Income tax payable 780,000
Government remittances 160,000
Estimated liquidation expenses 120,000
Fully secured creditors:
Loan payable 1,200,000
Interest payable - Loan 70,000
Assets pledged to partially secured creditors:
Note payable 330,000

Total Unsecured liabilities without priority

Estimated recovery percentage of unsecured Net free assets

=
creditors without priority Total Unsecured liabilities without priority

Estimated recovery percentage of unsecured 1,210,000

=
creditors without priority 1,907,000

Estimated recovery percentage of unsecured = 63.45%

creditors without priority

Total amount of Note payable

Note payable
Interest payable - Note
Total
Less: Secured portion of note payable: Equipment, net
Unsecured amount without priority of note payable
Multiply by: Estimated recovery % of unsecured creditors w/o priority

Recoverable amount of unsecured portion w/o priority on notes payable

Total amount the issuer of the note payable expect to receive:

Secured portion of note payable: Equipment, net
Recoverable amount of unsecured portion w/o priority on notes payabl
 Total

4. Mr. A, an unsecured creditor without priority, has a claim of P80,000. How much can Mr. A
expect to recover on his claim?
a. 33,513
b. 45,135
c. 49,260
d. 50,760

Answer: D

Mr. A's claim

Multiply by: Estimated recovery % of unsecured creditors w/o prio

The next two questions are based on the following information:

Finished Co. is undergoing liquidation. The statement of affairs shows the following information:

ASSETS
Assets pledged to fully secured creditors
Assets pledged to partially secured creditors
Free assets

LIABILITIES
Liabilities with priority
Fully secured creditors
Partially secured creditors
Unsecured creditors

5. If all the assets were sold at their realizable values and all the liabilities were settled at their expected
settlement amounts, how much will the partially secured creditors receive?
a. 76,000
b. 84,000
c. 96,000
d. 104,000

Answer: B

Total net realizable assets

Less:
 Unsecured liabilities with priority 20,000
Fully secured creditors 130,000
Assets pledged to partially secured creditors 60,000

Total net free assets

Total settlement obligation

Less:
Unsecured liabilities with priority 20,000
Fully secured creditors 130,000
Assets pledged to partially secured creditors 60,000

Total Unsecured liabilities without priority

Estimated recovery percentage of unsecured Net free assets

=
creditors without priority Total Unsecured liabilities without priority

Estimated recovery percentage of unsecured 180,000

=
creditors without priority 300,000

Estimated recovery percentage of unsecured = 60.00%

creditors without priority

Partially secured creditors

Secured portion of the liability
Unsecured amount without priority
Multiply by: Estimated recovery % of unsecured creditors w/o priority

Recoverable amount of unsecured portion w/o priority on notes payable

Total amount the issuer of the note payable expect to receive:

Secured portion of the liability
Recoverable amount of unsecured portion w/o priority on notes payabl
Total

6. If all the assets were sold at their realizable values and all the liabilities were settled at their expected
settlement amounts, how much will the unsecured creditors receive?
a. 84,000
b. 96,000
c. 124,000
d. 156,000

Answer: D
 Unsecured creditors
Multiply by: Estimated recovery % of unsecured creditors w/o prio

Paramount Co.'s statement of affairs shows a 65% expected recovery of unsecured creditors
without priority, which consists of accounts payable with carrying amount of P800,000. The
accountant's working paper show the following:
Suppliers Balances Notes
Athena Co. 600,000 Waived repayment of P100,000.
Riley Co. 80,000 To be cancelled upon return of the goods.
Naia Co. 120,000 Rebate of P50,000 is available.
Total 800,000

7. How much are the net free assets?

a. 370,499
b. 610,245
c. 422,500
d. 1,000,000

Answer: C

Unadjusted accounts payable

Adjustments:
Waived repayment from Athena Co. 100,000
Return of goods to Riley Co. -
Rebate from Naia Co. 50,000
Adjusted balance of unsecured liabilities without priority

Estimated recovery percentage of unsecured Net free assets

=
creditors without priority Total Unsecured liabilities without priority

x
65% =
650,000

Net free assets = 650,000 x 65%

Net free assets = 422,500

Use the following information for the next three questions:

Rainy Co.'s financial position before its liquidation is as follows:

ASSETS LIABILITIES AND EQUITY

 Cash 100,000 Accounts payable
Accounts receivable 600,000 Loan payable
Inventory 900,000 Share capital
Equipment, net 400,000 Retained earnings (deficit)
Total 2,000,000 Total

Transactions in the first quarter of liquidation are as follows:

• 90% of the accounts receivable were collected. Commission of third party collectors
amounted to P108,000. The collectors expect to collect the remaining receivables in
the next quarter.
• Half of the inventory was sold at 80% of carrying amount. The other half is expected
to be sold at 60% of carrying amount.
• The equipment was sold for P380,000 after it was refurbished for P50,000.
• P100,000 accounts payable were paid.
• Employee termination benefits of P100,000 were recorded and P80,000 of that amount
were paid.
• The lender accepted P1,000,000 as full payment of the loan.
• Liquidation costs of P50,000 were paid.
• Scrap materials from clearing the warehouse were sold for P10,000.

8. How much "assets realized" is presented on Rainy's statement of realization and liquidation?
a. 1,122,000
b. 1,212,000
c. 1,312,000
d. 1,321,000

Answer: A

Rainy Co.in receivership

Statement of realization and liquidation
(period)

ASSETS
Assets to be realized: Assets realized:
Accounts receivable 600,000 Accounts receivab
Inventory 900,000 Inventory
Equipment, net 400,000 Equipment, net
Total 1,900,000 Total

Assets acquired: Assets not realized:

Accounts receivab
Inventory
Total - Total

LIABILITIES
 Liabilities liquidated: Liabilities to be liquidated:
Accounts payable 100,000 Accounts payable
Loan payable 1,000,000 Loan payable
Employee termination bene 80,000
Total 1,180,000 Total

Liabilities not liquidated: Liabilities assumed:

Accounts payable 1,500,000 Employee termina
Employee termination bene 20,000
Total 1,520,000 Total
Zyne:
squeeze from total.
Trace formula
SUPPLEMENTARY ITEMS
Supplementary expenses: Supplementary income:
Liquidation expenses 50,000 Scrap materials
9. Answer: C Net gain during the period 192,000
Total 242,000 Total

TOTAL 4,842,000

CASH ACCOUNT

Beginning 100,000 1,180,000

Assets realized 1,122,000 50,000
Supplementary income 10,000
1,232,000 1,230,000

2,000

Assets realized
Accounts receivable 432,000
Inventory 360,000
Equipment, net 330,000
1,122,000

Assets not realized

Accounts receivable 60,000
Inventory 450,000
510,000

9. How much net gain (loss) is reported on Rainy's statement of realization and liquidation?
a. 178,000
b. (178,000)
 c. 192,000
d. (192,000)

Answer: C. Refer above solution

10. How much is the ending balance of cash?

a. 1,800
b. 2,000
c. 5,000
d. 0

Answer: B. Refer above solution

 LIABILITIES AND EQUITY
1,600,000
900,000
(secured by eqpt) 1,000,000
(secured by land & bldg) 1,200,000
2,000,000
(2,040,000)
4,660,000

of P2,300,000.
fter refurbishment costs of P70,000.
count which Sunday intends to take.

e the tax liability for P780,000.

note and loan, respectively.

ted on the balance sheet above,

Realizable value

100,000
360,000
780,000
1,100,000
Total value of P2,300,000
1,200,000
330,000
3,870,000

Realizable value
1,157,000
160,000
780,000
1,000,000
80,000
1,200,000
70,000
120,000
4,567,000

2,000,000
(2,697,000)
3,870,000

2,000,000
(2,697,000)
(697,000)

3,870,000

(2,660,000)

1,210,000
 4,567,000

(2,660,000)

1,907,000

Net free assets

secured liabilities without priority

1,000,000
80,000
1,080,000
(330,000)
750,000
63.45%

475,878

330,000
475,878
 805,878

How much can Mr. A

80,000
63.45%
50,760

ows the following information:

Carrying amount Realizable value

160,000 190,000
90,000 60,000
200,000 140,000
450,000 390,000

20,000 20,000
130,000 130,000
100,000 100,000
260,000 260,000
510,000 510,000

s were settled at their expected

390,000
 (210,000)

180,000

510,000

(210,000)

300,000

Net free assets

secured liabilities without priority

100,000
(60,000)
40,000
60.00%

24,000

60,000
24,000
84,000

s were settled at their expected

 260,000
60.00%
156,000

of unsecured creditors
ount of P800,000. The

Notes
ment of P100,000.
d upon return of the goods. zero effect upon return of goods.
,000 is available.

800,000

zero effect upon return of goods.

(150,000)
650,000

Net free assets

secured liabilities without priority

LIABILITIES AND EQUITY

 1,600,000
1,500,000
2,000,000
(3,100,000)
2,000,000

rd party collectors
ning receivables in

er half is expected

80,000 of that amount

zation and liquidation?

dation

432,000
360,000
330,000
1,122,000 8. Answer: A

ot realized:
60,000
450,000
510,000
es to be liquidated:
1,600,000
1,500,000

3,100,000

es assumed:
100,000

100,000

mentary income:
10,000

10,000
Trace formula
4,842,000 4,650,000 4,842,000

Liabilities liquidated
Supplementary expenses

Ending Cash balance 10. Answer: B

(600,000 x 90%) - 108,000

(900,000 x 50%) x 80%
(380,000 - 50,000)

(600,000 x 10%)
(900,000 x 50%)

on and liquidation?