Accounting for Special

Transactions
ACG017
Corporate Liquidation
LECTURE WEEK NO. 5
 Corporate Liquidation
Statement of Affairs
The financial statement design for an insolvent corporation is the statement of affairs.
It is a statement of financial position as of a given date presenting the assets and the
liabilities of the corporation from a liquidation viewpoint. Thus, assets presented in the
statement of affairs are valued at current FAIR VALUES. In addition, assets and liabilities
are classified according to the rankings and priorities; the current/non-current
classification used in a balance sheet for a going concern is not appropriate for the
statement of affairs.
Accompanying a statement of affairs is a Statement of realization and liquidation.
This statement shows the gains or losses on realization of assets and a list of additional
costs associated with the liquidation.
Definition of Terms:

1. Fully Secured Liabilities - These are liabilities that can be fully settled using the assets of the
company as collateral.

2. Partially Secured Liabilities – These are liabilities that can be partially settled using the assets of
the company as collateral.

Since the collateral assets of the company are not enough to pay the remaining part of
these liabilities, the company cannot pay 100% of these liabilities.

Partially Secured Liabilities are divided into two: Secured Portion and Unsecured Portion.

a. Secured Portion of Partially Secured Liabilities – This portion of liabilities can be settled
using the collateral assets of the company.

b. Unsecured Portion of Partially Secured Liabilities – This is the remaining portion of the
liabilities that doesn’t have any collateral assets. It can only be settled using the remaining
assets of the company.
3. Unsecured Liabilities with Priority – These are liabilities that are not collateralized
by any assets but must be prioritized after the fully and partially secured liabilities.
These are unsecured liabilities with Priority:
a. Administrative Expenses – Example: Liquidating Expenses
b. Taxes Payable
c. Salaries Payable / Accrued Wages
4. Unsecured Liabilities without Priority – These are liabilities that are not
collateralized by any assets and it is the last priority when it comes on payment. It
can only be settled using the remaining assets of the company after paying the
liabilities mentioned above.
5. Free Assets – These are assets of the company that are not used as collateral for
any liabilities. Therefore, these are remaining assets that are used in payment for
unsecured liabilities with and without priority.
 Examples:

Assets (at Fair Value) Liabilities

Cash 100,000 Accounts Payable 300,000

Accounts Receivable 250,000 Salaries Payable 50,000

Notes Receivable 200,000 Taxes Payable 70,000

Inventory 180,000 Notes Payable (secured by inventory) 200,000

Building 1,000,000 Loan Payable (secured by Land) 4,500,000

Land 5,000,000
Solution:

1. Fully Secured Liabilities –

Loan Payable = P 4,500,000 (Secured by Land = P 5,000,000)

*Note = Loan Payable is classified as Fully secured liabilities since it can be settled fully by
the Land amounting to P 5,000,000

2. Partially Secured Liabilities –

Notes Payable = P 200,000 (Secured by Inventory = P 180,000)

*Note = Notes Payable is classified as partially secured liabilities since the inventory
amounting to P180,000 is not enough as payment for the whole P 200,000.

a. Secured Portion of Partially secured = P 180,000 since it is the only amount covered by
inventory

b. Unsecured Portion of Partially Secured = P 20,000. It is the uncovered portion of the asset
or the remaining amount of the liability.
 3. Unsecured Liabilities with Priority
Salaries Payable P 50,000
Taxes Payable 70,000
Total P 120,000

4. Unsecured Liabilities without Priority

Accounts Payable = P 300,000
*Note = Accounts Payable is classified as unsecured liability without priority
since it doesn’t covered by any collateral assets and it is not part by those
liabilities with priority.
5. Free Assets

Cash 100,000

Accounts Receivable 250,000

Notes Receivable 200,000

Building 1,000,000

Land (remaining amount) 500,000

Total Free Assets P 2,050,000
*Note = these are the remaining assets that can be used to settle the unsecured liabilities.
REFERENCES / ADDITIONAL READINGS

Guerrero, P. P., & Peralta, J. F. (2017). Advanced

Accounting Volume 1: Principles and Procedural
Applications. GIC Enterprises & Co., Inc.