COURSE AFAR 2: ADVANCED FINANCIAL ACCOUNTING AND REPORTING 1

This module is prepared by professor Venus L. Catacutan. She’s an

associate professor in the College of Business and Accountancy-
DEVELOPER AND THEIR Accountancy department at Tarlac State University . Being a Certified
BACKGROUND Accountant, in addition to her teaching profession, shes’ likewise involve
in public practice which brings to this module some experiences on
specialized accounting concerns of different industries.

This course is designed to provide fundamental knowledge to students

concerning accounting for special transactions and advanced financial
reporting issues likely to be encountered in practice. It deals with the
sthe study of fundamental valuation accounting theory as applied to
special income and expense recognition methods and expanded
COURSE DESCRIPTION business operations. The course includes specialized problems in
partnership accounting, revenue from contract with customers (PFRS 15)
and accounting for domestic branches. The other topics deal with
accounting for the effect of changes in foreign exchange rates and other
similar current issues. Likewise discussed are debt restructuring and
accounting for financially distressed corporations.
1. Partnership Formation
2. Partnership Operations
3. Partnership Dissolutions
4. Partnership Liquidation (lump-Sum and Installment method)
5. Corporate Liquidation
6. Revenue Recognition- contract with customers (PFRS 15)
7. Revenue Recognition- contract with customers (Construction
Contract)
8. Renenue Recognition- contract with customers ( Franchise and
COURSE OUTLINE
Consignment)
9. Home Office, Branch, and Agency Accounting (General
Procedures)
10. Home Office, Branch, and Agency Accounting (Special
Procedures)
11. Foreign Currency Transactions
12. Hedging and Derivatives (FOREX)
13. Foreign Currency Translation

CHAPTER # 5
TITLE CORPORATE LIQUIDATION
Corporate Liquidation, the topic that has been thoroughly discussed in
this module. It provides student an insight on the nature, concept and
legal considerations on liquidating a corporation. Business resort to this
action when its financial position cannot resolve its financial difficulties. In
addition, the step by step process in liquidating a corporation were
likewise discussed to guide the learners on what proper action they may
I. RATIONALE consider to address the concern/s. Specialized Accounting concerns are
also tackle in this module since, the basic focus of accounting for
liquidation is that of a “quitting concern” rather that a “going concern”
which is the usual assumption in accounting thus, it offers to
student/learner to develop knowledge and skills on how to handle
corporate liquidation concerns which a business student may encounter
in actual work environment.
The expected learning to be achieved by the student are properly
disclosed in the learning objectives stated below. Prior to taking this
course, a student must have already a concrete knowledge on basic
accounting concepts, and skills in preparing financial statements, on a
going concern which is the usual assumption in accounting. The user of
INSTRUCTION TO THE USERS this module must review the basic and financial accounting undertaken in
previous courses(preparatory activities)
The developmental activities section provides the comprehensive and
vital information regarding nature, concept and legal considerations in
liquidating corporation. It also provide s information and data on what
and how are the different financial reports when corporation is under
 liquidation.
further, it gives insights on how to address special accounting problems
that may encounter during liquidation process. To gauge the knowledge
attained by the student,,closure activities like theoretical questions and
problem solving with different degree in terms of difficulty were provided.
For evaluation , see the evaluation sectionfor details, and lastly for
activities and preparation to be undertaken for next topic this module
provides the student/s the details.

At the end of the chapter, the student shall be able to:

✓ Describe the accounting for non-going concern entities.
✓ Identify the legal considerations in liquidating a corporation.
✓ Determine the step by step process on how to liquidate
distressed corporation
✓ Identify the order of priority of the claimants to the company
II. LEARNING OBJECTIVES assets of corporation subject to liquidation
✓ Prepare, interpretand differentiate the Statement of Affairs,
Statement of Deficiency and Statement of Realization and
Liquidation
✓ Address o solve special accounting concerns of companies
under liquidation.

III. CONTENT
A. PREPARATORY ACTIVITIES

B. DEVELOPMENTAL ACTIVITIES

INTRODUCTION

Business failure is a common occurrence in a free enterprise in the past years. Weak operating control, incompetent
administration, inadequate financing, fraud, insufficient accounting or other unexpected and any other unexpected
adverse developments are some the reasons of business failures. There is variety of symptoms of business failure
but insolvency is the most common. Among the possible recourse of an insolvent corporation are reorganization and
liquidation.

Insolvency is a financial condition where the business’ liabilities exceeded the fair value of its assets which will result
to the difficulty in paying off its debts. It differs from illiquidity where the business is still solvent but it unable to pay
its maturing debts due to lack of cash or other liquid assets.

There are two types of insolvency as provided by Insolvency act of the Philippines:

1. Voluntary Insolvency – the insolvent corporation voluntarily applies a petition to a court of law to be
discharged from its liabilities.
2. Involuntary Insolvency – three or more creditors of the insolvent corporation file a petition to a court of law
for the adjudication of the corporation as insolvent.

CORPORATE LIQUIDATION

Liquidation is the termination of business operations or the winding up of business. It is the process by which the
assets of the business are converted into cash, the liabilities of the business are settled and any remaining
amount is distributed to the owners.

The process may be initiated by the company filing a voluntary petition with the Securities and Exchange
Commission (SEC). The corporation is given three years from the date of approval within which to wind up its affairs.
The SEC will appoint a receiver or trustee following the filing of a petition for liquidation or bankruptcy. The duties of
the receiver in a liquidation focuses in the realization of assets and settlement of liabilities rather than preservation
and continuation of the business. In the course of liquidation, the receiver may continue business activity if that is in
the interest of an orderly liquidation.

Measurement Basis

Since measurement bases prescribed in the Conceptual Framework and in the PFRS do not apply to liquidating
entities, the appropriate measurement basis is realizable value:
 a. Assets – estimated selling price less estimated cost to sell
b. Liabilities – expected net settlement amount

FINANCIAL REPORTS

Corporation in liquidation usually prepare two classes of financial reports:

a. Statement of Affairs – initial report which shows the available asset values and debts of the debtor
corporation.
b. Statement of Realization of and Liquidation – shows how the receiver managed the assets of the debtor
corporation on behalf of the creditors.

Aside from the above reports, additional statements such as note disclosures and summary of cash receipts and
disbursements may also be prepared.

STATEMENT OF AFFAIRS
This is the initial report prepared at the start of the liquidation process prepared for the corporation to provide
information about the current financial position of the company. The statement of affairs is an important planning
report designed to show the estimated amount that would be received by each class of claim in the event of
liquidation. It is prepared on the basis of an assumption of liquidation and not a going-concern.

Since statement of affairs is not a going concern report, the historical cost figures provided in a regular statement of
financial position are irrelevant. So, the assets and liabilities are restated to their realizable values. Also, the
conventional classification such as current assets and current liabilities deemed insignificant. Instead, the assets and
liabilities are reported according to the classification relevant to liquidation as follows:

• ASSETS

1. Assets Pledge To Fully Secured Creditors – these are assets with realizable value equal to or
greater than the realizable values of the related liabilities for which these assets have been pledge
as a security. The excess from paying the fully secured creditors remains for the unsecured
creditors. For example, a building with a realizable value of P3,000,000 secured a P2,000,000
mortgage payable. After paying the mortgage, the P1,000,000 remains for unsecured creditors.
2. Assets Pledge To Partially Secured Creditor – these are assets with realizable values less than
the realizable value of the liabilities for which these assets have been pledge as a security. For
example, a accounts receivable with a realizable value of P50,000 secures a P60,000 notes
payable.
3. Free Assets – these are assets that have not been pledged as security of liabilities. These also
include excess of realizable values of related assets pledged to fully secured creditors over the
realizable values of related liabilities for which these assets have been pledge. For example,
inventories with a realizable value of P20,000. Another, the excess from the example in number 1
above.

• LIABILITIES

1. Unsecured Liabilities With Priority – these are liabilities that, although not secured by any asset
are mandated by law to be paid first before any other unsecured liabilities. These liabilities includes
include the following:
a. Administrative expenses of the receiver
b. Unpaid employee’s salaries and wages, and benefit plans
c. Taxes
2. Fully Secured Liabilities – these are liabilities secured by assets with realizable values equal or
greater than the realizable values of such liabilities. For example, a bank holds a mortgage of
P3,000,000 on a building of the debtor corporation and the building has a realizable value of P
5,000,000. Thus, the mortgage is fully secured and the bank is the fully secured creditor.
3. Partially Secured Liabilities - these are liabilities secured by assets with realizable values less
than the realizable values of such liabilities. For example, a finance company holds a notes
P30,000 note secured by equipment of a debtor corporation. However, the estimated realizable
value of the said equipment was only P25,000. The note is partially secured the finance company
is the partially secured creditor.
4. Unsecured Liabilities – all other liabilities for which the creditor has no lien on specific assets of
the debtor corporation which are unsecured and without priority. Example of these liabilities is all
liabilities that do not fall under the above classifications. Another, the unsecured portion in the
partially secured liabilities.
Preparation and Format of the Statement of Affairs

The liabilities and capital side of statement of affairs have columns to show:
a. The book value of the liability or capital item;
b. The name of the liability or capital item; and
c. The amount of the liability that is unsecured.

The following need to be considered in constructing statement of affairs:

✓ The section headings for the statement should first be set up, with adequate space left between these for
the data to be shown.
✓ Each liability should be considered and reported in the appropriate liability section. If liability is secured, the
related asset should be considered at this time and reported in the appropriate asset section.
✓ After all liabilities have been considered, together with assets pledge on such claims, all remaining assets
represent unpledged assets may be listed as such.
✓ Asset and liability data are then summarized and the statement is completed.

Other formats may be used in constructing the statement of affairs but the most common format is shown below:

Name of the Company

Statement of Affairs
Date

Book Assets Estimated Realizable Free Assets

Values Values
Assets Pledge to Fully Secured Creditors:
P xxx (itemized) P xxx
Less: Liabilities to Fully Secured Creditors xxx P xxx
Assets Pledge to Partially Secured Creditors:
xxx (itemized) xxx
Less: Liabilities to Partially Secured Creditors xxx xxx
Free Assets:
xxx (itemized) xxx xxx
Total Free Assets P xxx
Less: Unsecured liabilities with priority xxx
Net Free Assets P xxx
Estimated Deficiency to Unsecured Creditors (to xxx
balance)
P xxx TOTAL P xxx

Book Liabilities & Equity Creditors’ Claims Unsecured

Values Liabilities
Unsecured Liabilities with Priority:
P xxx (itemized) P xxx
Fully Secured Creditors:
xxx (itemized) xxx xxx
Partially Secured Creditors:
xxx (itemized) xxx
Less: Value of Pledged Assets xxx xxx
Unsecured Creditors without Priority
xxx (itemized) xxx xxx
xxx Stockholders’ Equity xxx
P xxx TOTAL P xxx

Illustration:
JK Company has filed for voluntary insolvency and is about to liquidate its business. JK Co.’s statement of financial
position immediately prior to the liquidation process is shown below:

JK Company
Statement of Financial Position
December 31, 2020

ASSETS
Current Assets:
Cash P 50,000
 Accounts Receivable 150,000
Notes Receivable 200,000
Inventory 400,000
Prepaid Assets 20,000

Non-current Assets:
Land 500,000
Building, net 3,000,000
Equipment, net 350,000

TOTAL P 4,670,000

LIABILITIES & EQUITY

Current Liabilities:
Accounts Payable P 500,000
Current Tax Payable 400,000
Accrued Expenses 60,000

Non-current Liabilities:
Notes Payable (Secured by Equipment) 300,000
Loans Payable (Secured by Land and Building) 3,500,000
Total Liabilities 4,760,000

Capital Deficiency:
Share Capital 500,000
Retained Earnings (Deficit) (590,000)
Capital Deficiency (90,000)
TOTAL P 4,670,000

Additional Information
The following information was determined before the commencement of the liquidation process:
a. Only 80% of the accounts receivable is collectible.
b. Notes receivable is fully collectible. An accrued interest of P20,000 is yet to be recorded.
c. The inventory has an estimated selling price of P385,000 and estimated cost to sell of P5,000.
d. The prepaid assets are non-refundable.
e. The land and building has a fair value of P 3,000,000 and P 800,000, respectively. However, JK Co. expects
to sell both land and building for a total selling price of P3,600,000. Costs to sell the land and building are
negligible as the prospective buyer agrees to shoulder all necessary costs of transferring title to the
property.
f. The equipment is expected to be sold at a net selling price of P250,000.
g. Administrative expenses expected to be incurred during liquidation process is P30,000. This amount is not
yet recorded.
h. Accrued expenses include accrued salaries of P42,000.
i. Accrued interest on the loan payable amounting P18,000 is yet to be recorded.
j. All other liabilities are stated at their expected settlement amounts.

Requirement: Prepare the statement of affairs as of January 1, 2021.

Solution:
Step 1: Restate assets and liabilities to realizable values.

Book Values Realizable

Values
ASSETS
Cash P 50,000 P50,000
Accounts Receivable 150,000 (150,000 x 80%) 120,000
Notes Receivable 200,000 200,000
Interest Receivable - 20,000
Inventory 400,000 (385,000 – 380,000
5,000)
Prepaid Assets 20,000 -
Land and Building 3, 500,000 3,600,00
Equipment, net 350,000 250,000
 TOTAL P 4,670,000 P 4,620,000

LIABILITIES & EQUITY

Accounts Payable P 500,000 P500,000
Current Tax Payable 400,000 400,000
Accrued Expenses 60,000 60,000
Notes Payable 300,000 300,000
Loans Payable 3,500,000 3,500,000
Interest Payable - 18,000
Estimated Admin. Expense - 30,000
Total Liabilities P4,760,000 P4,808,000

Capital Deficiency (90,000) Estimated (188,000)

Deficiency
(Balancing
Figure)
TOTAL P 4,670,000 P 4,620,000

Notes:
✓ The land and building are restated to realizable values rather than at fair values. Fair value favors “going-
concern” while realizable value normally reflects a price in a forced sale transaction, which is the case for an
entity undergoing liquidation.
✓ The unrecorded assets and liabilities are recognized.
✓ The difference between the restated assets and liabilities represents the estimated deficiency in the
settlement of unsecured non-priority creditors. If a deficiency exists, the claims of the unsecured creditors
without priority will not be paid in full.

Step 2: Identify the classification of assets and liabilities

The classifications of assets in the statement of affairs are identified as follows:

Realizable Available for Unsecured
Values Creditors
Assets Pledge to Fully Secured
Creditors:
Land & Building P3,600,00
Loan Payable (3,500,000)
Interest Payable (18,000) P82,000

Assets Pledge to Partially Secured

Creditors:
Equipment, net 250,000

Free Assets:
Cash 50,000
Accounts Receivable 120,000
Notes Receivable 200,000
Interest Receivable 20,000
Inventory 380,000
Prepaid Assets - 770,000
Total Free Assets P852,000

The classifications of assets in the statement of affairs are identified as follows:

Secured and Unsecured

Priority Claims Liabilities without
priority
Unsecured Liabilities with Priority:
Current Tax Payable P 400,000
Estimated Admin. Expense 30,000
Accrued Salaries 42,000
P472,000
Fully Secured Creditors:
 Loan Payable P3,500,000
Interest Payable 18,000
P3,518,000
Partially Secured Creditors:
Notes Payable P300,000
Equipment (250,000)
(P50,000) P50,000
Unsecured Liabilities without Priority:
Accrued Expense, net of accrued salaries P18,000
(60,000 – 42,000)
Accounts Payable 500,000
Total P518,000 P518,000
P568,000

Step 3: Estimated Recovery Percentage (Optional)

Estimated recovery percentage will determine how much will the unsecured creditors without priority will receive. The
formula for this percentage is as follows:
𝑵𝒆𝒕 𝑭𝒓𝒆𝒆 𝑨𝒔𝒔𝒆𝒕𝒔
Estimated recovery percentage =
𝑻𝒐𝒕𝒂𝒍 𝑼𝒏𝒔𝒆𝒄𝒖𝒓𝒆𝒅 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 𝒘𝒊𝒕𝒉𝒐𝒖𝒕 𝑷𝒓𝒊𝒐𝒓𝒊𝒕𝒚

Total Free Assets P 852,000

Total Unsecured Liabilities with Priority (472,000)
Net Free Assets 380,000
Divided by Total Unsecured Liabilities without Priority 568,000
Estimated Recovery Percentage 66.90%

The estimated amounts to be recovered by each class of creditors are computed as follows:

Total Recovery Estimated

Claims Percentage Recovery
Unsecured Liabilities with Priority P472,000 100% P472,000
Fully Secured Creditors 3,518,000 100% 3,518,000
Partially Secured Creditors: 300,000 94.48% 283,451
Secured Portion (250,000 x 100%)
Unsecured Portion (50,000 x 66.90%)
Unsecured Liabilities without Priority 518,000 66.90% 346,549
Shareholders None 0% -
Total Assets at Realizable Value P4,620,000

Step 4: Statement of Affairs

The statement of affairs is prepared as follows:

JK Company
Statement of Affairs
December 31, 2020

Book Values Assets Estimated Realizable Free Assets

Values
Assets Pledge to Fully Secured Creditors:
P3, 500,000 Land & Building P3,600,00
Loan Payable (3,500,000)
Interest Payable (18,000) P82,000

Assets Pledge to Partially Secured

Creditors:
350,000 Equipment, net 250,000
Notes Payable (300,000)

Free Assets:
50,000 Cash 50,000
150,000 Accounts Receivable 120,000
200,000 Notes Receivable 200,000
- Interest Receivable 20,000
 400,000 Inventory 380,000
20,000 Prepaid Assets - 770,000
Total Free Assets P 852,000
Unsecured liabilities with priority (472,000)
Net Free Assets P380,000
Estimated Deficiency to Unsecured Creditors
(squeeze) (568,000 – 380,000) (P188,000)
P 4,670,000 TOTAL P568,000

Book Values Liabilities & Equity Creditors’ Claims Unsecured

Liabilities
Unsecured Liabilities with Priority:
P 400,000 Current Tax Payable P 400,000
Estimated Admin. Expense 30,000
42,000 Accrued Salaries 42,000
P472,000
Fully Secured Creditors:
3,500,000 Loan Payable 3,500,000
Interest Payable 18,000

Partially Secured Creditors:

300,000 Notes Payable 300,000
Equipment (250,000) P50,000
Unsecured Liabilities without Priority:
18,000 Accrued Expense, net of accrued salaries P18,000
(60,000 – 42,000)
500,000 Accounts Payable 500,000 518,000
Total Unsecured Creditors 568,000

(90,000) Shareholders’ Equity - -

P 4,670,000 P568,000

STATEMENT OF DEFICIENCY

A deficiency statement is usually prepared to accompany the statement of affairs to prove the deficiency to
unsecured creditors. It shows the causes of deficiency by summarizing losses and gains from realization and
unrecorded adjustments to assets and liabilities. The following is the statement of deficiency of JK Company:

JK Company
Statement of Deficiency
December 31, 2020

Estimated Losses on Realization of Assets

Accounts Receivable P 30,000
Inventory 20,000
Prepaid Assets 20,000
Equipment 100,000 P170,000
Additional Liabilities:
Interest Payable 18,000
Estimated Admin. Expense 30,000 48,000
Estimated Gross Loss
Less:
Estimated Gains on Realization of Assets
Land and Building 100,000
Additional Assets
Interest Receivable 20,000 (120,000)
Estimated Net Loss
Less:
Loss Absorbed by Stockholders:
Common Stock 500,000
Deficit (590,000) 90,000
Estimated Deficiency To Unsecured Creditors (loss to be P188,000
absorbed by unsecured creditors)
STATEMENT OF REALIZATION AND LIQUIDATION

Statement of realization and liquidation shows a complete record of the transaction of the receiver for a period of
time. Its structure is similar to a T account, and is composed of three elements: asset transactions, and income/loss
transactions.

DEBITS CREDITS
Assets to be realized, excluding cash Assets realized
Assets acquired Assets not realized

Liabilities Liquidated Liabilities to be liquidated

Liabilities not liquidated Liabilities Assumed

Supplementary Charges (Expenses) Supplementary Credits (Income)

✓ Assets to be realized, excluding cash – represents the total non-cash assets available for disposal as of
the beginning of the period. This is measured at book values.
✓ Assets realized – represents the actual net proceeds received from the sale of non-cash assets during the
period.
✓ Assets acquired – represents previously unrecorded assets that were recognized during the period.
✓ Asset not realized - represents total cash available for disposal at the end of the period. This is measured
at book value.
✓ Liabilities to be liquidated - represents the total liabilities to be settled as of the beginning of the period.
This is measured at book values.
✓ Liabilities Liquidated - represents the total liabilities settled during the period.
✓ Liabilities Assumed - represents previously unrecorded liabilities that were recognized during the period.
✓ Liabilities not Liquidated - represents the total liabilities yet to be settled as of the end of the period.
✓ Supplementary Charges – represents expenses incurred during the period excluding assets losses and
write-offs.
✓ Supplementary Credits – represents income realized during the period excluding gains on asset
realization and liability settlement.

Illustration:
On March 31, 2021, the following information was available from the statement of affairs of JK Company:

Cash P50,000
Accounts Receivable 120,000
Notes Receivable 200,000
Interest Receivable 20,000
Inventory 380,000
Land and Building 3,600,00
Equipment, net 250,000
Accounts Payable P500,000
Current Tax Payable 400,000
Accrued Expenses 60,000
Notes Payable 300,000
Loans Payable 3,500,000
Interest Payable 18,000
Estimated Admin. Expense 30,000
Capital Deficiency (188,000)

For the next three months, the following transactions occur:

a. 95% of the accounts receivables were collected, the remaining amount was written-off.
b. The 60% inventories were sold at 20% above cost. The actual cost to sell is P10,000.
c. Of the notes receivable, only P180,000 was collected. The remaining amount was written-off. All
accrued interest was received.
d. The equipment was disposed at P230,000.
e. Payment of P200,000 of accounts payable.
f. Current tax payable paid in full.
g. Of the P60,000 accrued expenses, only the P42,000 accrued salaries was paid.
h. Half of the notes payable were paid.
 i. The land and building was sold at P3,600,000.
j. The loans payable including the interest payable of P18,000 was paid in full.
k. Furniture and fixture amounting P10,000 was acquired.
l. Other administrative expense was paid, P20,000.
Entries:
a. Cash P114,000
Estate Deficit 6,000
Accounts Receivable P200,000
To record collection of accounts receivable.

b. Cash [(380K x 60% x 120%) – P263,600

10K]
Inventory P228,000
Estate Deficit 35,600
To record sale of inventory.

c. Cash (180k + 20K) P200,000

Estate Deficit 20,000
Notes Receivable P200,000
Interest Receivable 20,000
To record collection of notes receivable and interest.

d. Cash P230,000
Estate Deficit 20,000
Equipment P250,000
To record sale of Equipment.

e. Accounts Payable P200,000

Cash P200,000
To record settlement of P200,000 accounts payable.

f. Current Tax Payable P400,000

Cash P400,000
To record settlement of current tax payable.

g. Accrued Expenses P42,000

Cash P42,000
To record settlement of P42,000 accrued salaries expenses.

h. Notes Payable P150,000

Cash P150,000
To record settlement of Notes Payable.

i. Land and Building P3,600,000

Cash P3,600,000
To record sale of Land and Building.

j. Loans Payable P3,500,000

Interest Payable 18,000
Cash P3,518,000
To record settlement of loans payable and interest.

k. Furniture and Fixtures P10,000

Cash P10,000
To record acquisition of furniture and fixtures.

l. Estate deficit P20,000

Cash P20,000
To record payment of administrative expenses.
 JK Company
Statement of Realization and Liquidation
March 31, 2020

Assets to be realized: Asset Realized:

Accounts Receivable 120,000 Accounts Receivable P114,000
Notes Receivable 200,000 Notes Receivable 180,000
Interest Receivable 20,000 Interest Receivable 20,000
Inventory 380,000 Inventory 263,600
Land and Building 3,600,00 Land and Building 3,600,00
Equipment, net 250,000 P4,570,000 Equipment, net 230,000 P4,407,600
Assets Acquired: Asset Not Realized:
Furniture and Fixtures P10,000 P10,000 Inventory P152,000
Furniture and Fixtures 10,000 P162,000

Liabilities Liquidated: Liabilities To Be

Liquidated:
Accounts Payable P200,000 Accounts Payable P500,000
Current Tax Payable 400,000 Current Tax Payable 400,000
Accrued Expenses 42,000 Accrued Expenses 60,000
Notes Payable 150,000 Notes Payable 300,000
Loans Payable 3,500,000 Loans Payable 3,500,000
Interest Payable 18,000 P4,310,000 Interest Payable 18,000
Liabilities Not Estimated Admin. 30,000 P4,808,000
Liquidated: Expense
Accounts Payable P300,000 Liabilities Assumed: 0
Notes Payable 150,000
Accrued Expenses 18,000
Estimated Admin. 30,000 P498,000
Expense

Supplementary Supplementary 0
Charges: Credits:
other liquidation P20,000 P20,000
expenses

Sub-total P9,408,000 Sub-total P9,377,600

Net Loss P30,400
TOTAL P9,408,000 P9,408,000

If financial statements are to be prepared to accompany the statement of realization and liquidation:
JK Company
Statement of Financial Position
December 31, 2020

ASSETS
Current Assets:
Cash P 117,600
Inventory 152,000
Non-current Assets
Furniture and Fixtures 10,000

TOTAL P279,600

LIABILITIES & EQUITY

Current Liabilities:
Accounts Payable P300,000
Accrued Expenses 18,000
Notes Payable 150,000
Estimated Admin. Expense 30,000
Total Liabilities 498,000

Capital Deficiency (218,400)

 TOTAL P279,600

Cash balance is computed as follows:

Cash balance, December 31, 2020 P50,000

Add: Cash receipts
Accounts Receivable P114,000
Notes Receivable 180,000
Interest Receivable 20,000
Inventory 263,600
Land and Building 3,600,00
Equipment, net 230,000 P4,407,600

Less: Cash Payments/ Disbursements

Accounts Payable P200,000
Current Tax Payable 400,000
Accrued Expenses 42,000
Notes Payable 150,000
Loans Payable 3,500,000
Interest Payable 18,000
Furniture and Fixtures 10,000
Other liquidation expenses 20,000 P4,340,000

Cash balance, March 31, 2021 P117,600

Alternatively, the ending cash may be computed as follows:

Estate Deficit, End. P(218,400)

liabilities not liquidated 498,000
Total 279,600
Asset not realized (162,000)
Cash, End P117,600

C. CLOSURE ACTIVITIES:

The following work exercises intend to evaluate what the learners have learned in this topic. Write your answers in
your portfolio journal.

I. REVIEW QUESTIONS

1. Differentiate liquidity and solvency.

2. Identify various classes of creditors whose claims are to be satisfied in corporate liquidation.
3. What is a Statement of Affairs?
4. What is a Statement of Realization and Liquidation?
5. Describe the liquidation process.

II. TRUE OR FALSE

1. Total unsecured liabilities do not include unsecured debts with priority.

2. Certain debts are not dischargeable.
3. Unsecured liabilities consist of debts for which no assets are pledged as security as well as debts in excess
of liquidation value of assets pledged.
4. The estimated deficiency to unsecured creditors is total unsecured liabilities less total free assets.
5. The goal of liquidation is to give company new start.
6. All secured claims are paid in full.
7. Net free assets are the excess of liquidation value of assets pledged to fully secured creditors over the
amount of fully secured liabilities plus free assets less unsecured liabilities with priority.
8. The expenses to administer the estate are paid last because they are unsecured.
9. Liquidation is the termination of business operations or the winding up of business.
10. The statement of affairs is an important planning report designed to show the estimated amount that would
be received by each class of claim in the event of liquidation.
III. PROBLEMS

Problem 1: The unsecured creditors of ABC Corporation filed a petition on July 1, 2020 to force ABC Corporation
into bankruptcy. The court order for relief was granted on July 10 at which time an interim an interim trustee was
appointed to supervise liquidation of the estate. A listing of assets and liabilities of ABC Corporation as of July 10,
2020, along with the estimated realizable values, is as follows:
Assets Book Value Estimated Realizable Value
Cash P61,400 P61,400
Accounts Receivable 250,000 15% of the accounts receivable is estimated to
Allowance for doubtful accounts (20,000) 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 P110,000
Land 210,000 An offer of P500,000 has been received for land
Building, net 260,000 and buildings
Machinery and equipment, net 220,000 P53,900
Goodwill 200,000 ?
Total Asset P1,821,400
Liabilities & Equity
Accounts Payable P670,000
Wages Payable 3,400
Notes Payable 160,000
Accrued Interest-Notes 5,000
Mortgage Payable, secured by land and 400,000
building
Capital Stock 800,000
Deficit (297,000)
Total Liabilities & Equity P1,821,400

Additional information:
a. Patents completely written-off the books in past years but with realizable value of P10,000.
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 liquidating estate are estimated to be P60,000.

Requirement: Prepare a statement of affairs and determine the following:

1. Total free assets
2. Net free assets
3. Estimated deficiency to unsecure creditors
4. Expected recovery percentage of unsecured creditors
5. Estimated payment to each class of creditors

Problem 2: XYZ Company had a very unstable financial condition caused by a deficiency of liquid assets. On
February 5, 2020, the following information was available:
Cash P 112,000
Assets Not Realized
Accounts receivable 80,000
Merchandise Inventory 160,000
Investment in common stock 26,400
Land 100,000
Building 60,000
Machinery and equipment 48,000

Liabilities Not Liquidated

Notes payable 244,000
Accounts payable 288,000
Salaries and wages 40,000
Taxes payable 8,000
Bank loan 180,000
Estate deficit (173,600)

During the six-month period ending July 31,2020, 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, and taxes payable) as well as P7,440 for estate
administration expense.
Requirement: Prepare a statement of realization and liquidation and determine the following:
1. Estate Deficit, ending
2. Net (gain) loss on realization and liquidation
3. Cash Balance, ending

Problem 3. Katherine, a CPA, has prepared a statement of affairs. Asset which there are no claims or liens are
expected to produce P70,000, which must be allocated to unsecured claims of all classes totalling P105,000. The
following are some of the claims outstanding:
a. Accounting fees for Katherine, P1,500.
b. An unrecorded note for P1,000 on which P60 of interest has accrued, held by Angie.
c. A note for P3,000 secured by P4,000 receivables, estimated to be 60% collectible held by Joy.
d. P1,500 note, on which P30 of interest has accrued, held by Joyots. Property with a book value P1,000
and a market value of P1,800 is pledged to guarantee payment of principal and interest.
e. Unpaid income taxes of P3,500.
Compute:
1. Percentage of Recovery of Unsecured Creditors without Priority
2. Estimated deficiency
3. Net free asset
4. Total payment to partially secured creditors

Problem 4. ASDF Corporation filed a voluntary petition for bankruptcy on January 2020. On March 31, 2020, the
trustee provided the following information about the corporation’s financial affairs:
ASSETS BOOK VALUE FAIR VALUE
Cash 40,000 40,000
Accounts receivable 200,000 150,000
Inventories 300,000 140,000
Plant assets-net 500,000 560,000
TOTAL ASSETS 1,040,000

LIABILITIES
Liabilities for priority claims 160,000
Accounts payable-unsecured 300,000
Notes payable, secured by Accounts receivable 200,000
Mortgage payable, secured by Plant assets 440,000
TOTAL LIABILITIES 1,100,000

1. What amount is the deficit?

2. How much is the estimated deficiency?
3. How much are the net free assets?
4. What is the estimated recovery percentage of unsecured creditors without priority?

Problem 5. The following balances were ascertained in ZXC Inc. Which is experiencing insolvency:

Cash 8,000 Accounts payable 80,000

Notes Receivable 120,000 Accrued expenses 30,000
Inventories 80,000 Salaries payable 15,000
Prepaid expense 10,000 Mortgage payable 155,000
Equipment, net 150,000 Ordinary Shares 100,000
Deficit (12,000)
TOTAL 368,000 TOTAL 368,000

Additional information:
➢ Estimated net realizable value of the notes receivable was 105,000 and was pledged to the mortgage
payable.
➢ 80% of the book value of the inventories can be sold at 45,000 and was pledged to 60% of the accounts
payable.
➢ The remaining book value of the inventories has an estimated fair value of 20,000.
➢ 80% of the remaining unpaid accounts payable were secured by the equipment having an estimated fair
value of 60,000.
➢ Prepaid expense has no estimated fair value.
➢ Liquidation and administration expenses were estimated in the amount of 8,000.
 ➢ Income tax payable had been accrued in the amount of 2,000 (the accountant recorded it using the accrued
expense account).
➢ Interests on the notes receivable and mortgage payable have not been accrued in the amount of 10,000 and
15,000 respectively.

1. How much is the estimated deficiency?

2. How much are the net free assets?
3. How much is the estimated payment to the mortgage payable?
4. How much is the estimated recovery percentage to the partially secured accounts payable?

IV. SYNTHESIS/ GENERALIZATION

CHAPTER SUMMARY:

• Liquidation is the termination of business operations or the winding up of affairs. It is the process by which
the assets and liabilities are converted into cash, the liabilities of the business are settled, and the
remaining amount is distributed to owners.
• Entities undergoing liquidation measure their assets and liabilities in the statement of affairs at realizable
value.
• Liquidating entities usually prepare the following classes of financial reports: (a) Statement of Affairs and
(b) Statement of Realization and Liquidation. Additional statements such as note disclosure and summary
of cash receipts and disbursements may also be prepared.
• Statement of Affairs – initial report which shows the available asset values and debts of the debtor
corporation.
• Statement of Realization of and Liquidation – shows how the receiver managed the assets of the debtor
corporation on behalf of the creditors.
• Assets are classified as: (1) Assets pledged to fully secured creditors; (2) Assets pledged to partially
secured creditors; and (3) Free assets.
• Liabilities are classified as: (1) Fully secured creditors; (2) Partially secured creditors; (3) Unsecured
creditors with priority; and (4) Unsecured creditors.

V. EVALUATION

The student’s performance will be evaluated as follows:

20% Attendance, Poll Questioning and Oral Exercises
20% Portfolio Journal for work exercises
20% Formative Examination (One online/Offline written quiz covering this specific topic)
40% Summative Examination (This topic is one of the topics included in the Online/Offline Written Examination)

For the next topic, student should read and understand the core
VI. ASSIGNMENT/ AGREEMENT
principle and concept of PFRS 15 (Revenue from contracts with
customers).

Millan, Accounting for Special Transactions 2018e

Dayag, Advanced Financial Accounting and Reporting
VII. REFERENCES
2019e
Guerrero, Advanced Accounting 2017e

END OF CHAPTER 5