ReSA The Review School of Accountancy R. Papa Cor. S. H. Loyola Sts., Sampetoc, Manila &@ TEL NOS. 734-39-89 & 735-98-07 ADVANCED FINANCIAL ACCOUNTING Corporate Liquidation & REPORTING Enterprises in Financial Difficulty. Business Failure 13° & comon phenorenon in a free enterprise company. It may be due to a variety of reasons Such as. incompetent management, poor operating control, inadequate financing, ‘oF other Unexpected adverse developments. Among the inevitable symptoms of rusiness failure 1s a shortaye cf funds or a lack of liquidity, which results in the enteprige’s inability to meet .*» current obligations as they become due. Laquidsty. Liquidity reters wainly to a firm's ability to meet its short~ term obligations, while solveicy relates to the longer time span of obligation. Both of these situations are interrelated. An auditor who examines the financial statements of an enterprise with a history of losses and resulting financial Gifficulties and which may even be in default of loan agreement covenants must, ‘at some point, evaluate the enterprise's ability to survive financially. If there is evidence that the ability of the enterprise to continue as a going concern can no longer be safely assumed, the audizcr may have to qualify his or her opinion, Or, in sone cases disclaim en opinion. Insolvency. A business enterprize can be insolvent in the conventional (or equity) sense when it is unable ic pay off its liabilities as they become due. The enterprise is insolvent in the :egal sense when the financial condition is such that the sum of the eatity's debcs is greater than all of such entity’ property at fair valuation. Thus, in the legal sense, an enterprise remains Solvent as long as the fair valve of its assets exceeds its liabilities, even though the enterprise cannot mect its current maturing obligations because of an insufficiency of Jiquid resources. Liguidations. When the financral position of the debtor is such that it cannot resolve its financial difficulties by any of the following quess~ reorganization, troubled-debt restructu:ing, and dacion-en-pago accounting, the corporation will have to resort to a liquidation. This process may be started by the debtor filing a debtor's voluntary petition or creditor’s involuntary petition. Trustee in Bankruptoy. The duties of the trustee in liquidations are similar to those in a reorganization except that the focus is on a realization of Gosets. and a liquidation of, Liabilities rather than on preservation and Continuation of business. In addition, the trustee must assume control over the assets of the debtor, convert assets into cash, and liquidate the business Cnpeditiously ae is compatible with the best interests of affected parties. In the course liquidation, the trustee may continue business activities, if that is in the interest of ar orderly liquidation. ‘Acoounting and Reporting for Liquidation. The basic focus of accounting for a bankrupt is that of @ “quittiag concern” rather than a “going concern,” Gnich is the usual assumption in accounting, The statement that has been devised for that purpose is the statenent of eftairs, which is hypothetical or pro-forma int hature and. which represents the best estimate on the outcome of the Liquidation of a debtor's business. Basic Reports Prepared in Corporate Liquidation: i Statement of Affaire, This statencnt is prepared as of a given point in time for a business enterprise entering dato the stage of liquidation. The purpose of this statement is to display the essets and liabilities and of Che debtor enterprise from a liquidation viewpoint, because liquidation is the outcome of the bankruptcy proceedings. Thus, assets displayed in the Statement of affairs are valued at current fair values; carrying amounts are presented on 2 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, ts original purpose is to inform the pankeuptcy court and interested creditors of the accomplishments of the trustee. che Statement of Realisation and Liquidation differs from the statement of Affaire in the following respects: i. ‘The statement of realization and liquidation reports the actual Liquidation results. In contrast, the statement of affairs is of « pro- forma nature and is bused cn estimates rather than actual results. 2. The statenent of realization and liquidation provides an oagoieg reporting of the trustes’s activities ond is updated throughout the Liguidstioa procass. The statement of affairs is s summary of the ‘estimated results cf a completed Liquidation. 03ADVANCED FINANCIAL ACCOUNTING 6 REPORTING page 2 1 Corporation filed a petition on July nto tankruptcy. The court order for stich tine an interim trustee was he estate. A Listing of assets and fF taaolve Corperstien as of July 19, 2016, along with ~ Tok value FL, a0 Foueivable 755, 000] ince tor D/A > unsecured creditors 1 2016 to force 1 ef was granted on appainted to supery se . igus Tof the accounts receivable is 0,000) estimated to be uncollectible Srtories ou] Estimated selling price, P340, 000 which will require additional costs of P50, 000 Thal expense — 2 vestment F110, 000 Tana Buridings (net), Ba ol fer of P500,000 has been rece:ved for land and buildings P53, 900 Goodwill Total Assets Liabilities ¢ Equity Recounts payable _ wages payable Notes payable Accrued intere notes. _ Mortgage payable, secured by and bu: s ‘pital stock Additional paid-in capital Deficit [Total Liab. Additional 1 a. Paten realizable value of The books expenses /ad¢ = books in past years but with a roliewing accruals (unrecerded Taxe: os P16, 400 Interest 9n mort gage 10,000 c. The investment have been piedged as security for holder of the notes payable. d. The trustee fees and cthor costs liquidating the estate are estimated to be F60,0u0. Determine: . The total free assets should a. P1,831, 400 £717,800 b. 1,821, 100 638, 000, 2. The net free assets should he: a. P717,800, GC b. 698,000 a, 3. The estimated deficiency 19 unsecured creditors should be: a. P87, 000 + 827,000 b. 47,890 d. 7,200 4. The expected recovery gerventa:* of unsecured creditors should bet a. 96,008 =. 48.00) b. 95.008 re. 62 5. The estimated paymo:t io cred.tors should bet Unsecured Creditors Fully Secured ted With priority Without Priority a. P 410,000 79, 800, 638, 000. ». 500,006 0, 00 589, 600 c. 410,000 79,800 * 670, 00 a. 410,006 19, 800 589, 69: AFAR-03ADVANCED FINANCIAL ACCOUNTING & REPORTING pege 3 6. The estimated payment to creditors should be: a. 1,324,800 cc. P1, 264,800 b. 1,308,000 4. 1,237,800 ; The estimated net gain or loss on asset realization should be: 583, 600 c. P670,000 b.” 593,600 4. 680,000 5. The estimated net loss should & 2. P583, 600 c. P670,000 b. 593,600 4. 680,000 qr Parcinc Dissolved Corporation filed a voluntary petition for bankruptcy on January 2016. On March 31, 2016, the trustee provided the following formation about the corporation's financial affairs: Retinated Book Value Realisable Values cash P 40,000 40,000 Accounts receivable - = 209,000 150, 000 Inventories 300, 000 140, 000 Plant assets - net 500, 000 560, 000 Total Assets Pi,040,.000 Liabilities Liabilities for priority claims P 160,000 Accounts payable-unsecured 300, 000 Notes payable, secured by Accounts receivable 200, 000, Mortgage payable, sec by all plant assets tal liabilities ea Determine he amount expected to be svailable for unsecured claims without priority (net free assets): a. P 300,000 ce. P 140,000 b. 580,000 d. 310,000 2. The expected recovery per peso 2f unsecured creditors: a. P .215 c. P 415) be .223 4. .400 3. The estimated payment to creditors: a. P730,000 . P77, 000 b. 45,000 4. 890,000 qr ‘The following information was available on March 31, 2016 for Bankrupt Corporation, which they cannot pay their liabilities when they are due: Carrying Amounts cash P 16,000 Trade accounts receivable (net): Current fair value equal to cerryiug amount 184,000 Inventories: Net realizable value, P72, 000; pledged on P84,000 of notes payable 156,000 Plant assets: Current fair value, P269, 600; pledged on mortgage notes payable 536,000 Accumulated depreciation of plant assets 108,000 Supplies: Current fair value, P6,000 8,000 Wages payable, all earnec during March 23,200 Property taxes payable 4,800 Trade accounts payable 240,000 Notes payable, P84,000 secured by inventories 160,000 Mortgage payable, including accrued interest of Pl, 600 201, 600 Common stock, P5 par 400, 000 Deficit 237,600 AFAR-03