BADVAC2X – ACCOUNTING FOR SPECIAL TRANSACTIONS

MODULE 5: CORPORATE LIQUIDATION

NOTES:

1. The primary focus of the corporate liquidation is that the corporation’s financial condition is prepared in its liquidating
concern rather than the usual going concern assumption in accounting. This is achieved by preparing statement of affairs

2. In the preparation of statement of affairs, the assets and liabilities and liabilities are valued at its estimated realizable
values, while historical amounts are also included for reference purposes.

3. The assets and liabilities are also classified as follows:

a. assets pledged to fully secured creditors – these assets whose estimated realizable values greater than or equal to
liabilities which they have been pledged or mortgaged as collateral

b. assets pledged to partially secured creditors – these assets whose estimated realizable values less than the liabilities
which they have been pledged or mortgaged as collateral

c. free assets – these are assets not pledged or mortgaged to any specific liability and therefore available for distribution

d. fully secured liabilities – these liabilities are covered by pledge or mortgage of specific assets of estimated realizable
values greater than or equal to such liabilities.

e. partially secured liabilities – these liabilities are covered by pledge or mortgage of specific assets of estimated
realizable values less than such liabilities

f. unsecured liabilities with priority – these are liabilities that must be paid first before any class of liability by virtue of law
(ex. Salaries and wages and taxes)

g. unsecured without priority – these liabilities have no legal priority nor security to specific assets and therefore last
order of priority

4. The concern of unsecured creditors without priority is the estimated percentage of recovery. It is determined using the
following formula:

Net Free Assets

_______________

Total unsecured creditors without priority

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STRAIGHT PROBLEMS

PROBLEM 1: The following data are taken from the statement of affairs of Motor Sports Company

Assets pledged with fully secured creditors

(realizable value, P635,000) P800,000
Assets pledged with partially secured creditors
(realizable value, P300,000) 365,000
Free assets (realizable value, P340,000) 535,000
Fully secured creditors claims 316,000
Partially secured creditor claims 400,000
Unsecured creditor claims with priority 100,000
General unsecured creditors claims 1,165,000
Required: Determine the amount that will be paid to each class of creditor.

PROBLEM 2: A Company going through a bankruptcy has the following account balances:
Cash P30,000
Receivables (30% collectible) 50,000
Inventory (worth P39,000) 90,000
Land (worth P120,000) secures note payable 100,000
Buildings (worth P180,000) secures bonds payable 200,000
Salaries payable 10,000 with priority
Accounts payable 90,000
Notes payable (secured by land) 110,000 FSLiab
Bonds payable (secured by building) 300,000 PSL
Common stock 100,000
Retained earnings 140,000

Required: How much will be paid to each of the following: (a) Salaries payable, P10,000 (b) Accounts payable, (c) Note
payable, P110,000 (d) Bonds payable

PROBLEM 3. A company is to be liquidated and has the following liabilities

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 8,000
Notes payable (secured by land) . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000
Salaries payable (evenly divided between two employees) . . . . . . . 6,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Administrative expenses for liquidation . . . . . . . . . . . . . . . . . . . . . 20,000
The company has the following assets:
Book value Realizable value
Current assets P80,000 P35,000
Land 100,000 90,000
Buildings and equipment 100,000 110,000
How much money will the holders of the notes payable collect following the liquidation?

PROBLEM 4. Ataway Company has severe financial difficulties and is considering filing a bankruptcy petition. At
this time, it has the following assets (stated at net realizable value) and liabilities
Assets (pledged against debts of P70,000) . . . . . . . . . . . . . . . . . . . P116,000
Assets (pledged against debts of P130,000) . . . . . . . . . . . . . . . . . . 50,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Liabilities with priority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000
Unsecured creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
In a liquidation, how much money would be paid on the partially secured debt?

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MULTIPLE CHOICE QUESTIONS

The following are taken from the statement of affairs of MM Corporation (#1 to #4)
Assets pledged for fully secured liabilities (current fair value, P75,000) P90,000
Assets pledged for partially secured liabilities (current fair value, P52,000) 74,000
Free assets (current fair value, P40,000) 70,000
Unsecured liabilities with priority 7,000
Fully secured liabilities 30,000
Partially secured liabilities 60,000
Unsecured liabilities without priority 112,000
1. The amount that will be paid to creditors with priority is
a. P6,000 b. P6,200 c. P7,000 d. P7,500
2. The amount to be paid to fully secured creditors is
a. P20,000 b. P30,000 c. P32,000 d. P35,000
3. The amount to be paid to partially secured creditors is
a. P52,700 b. P56,200 c. P57,000 d. P57,200
4. The amount to be paid to unsecured creditors is
a. P70,800 b. P72,000 c. P72,800 d. P78,200
A company is to be liquidated and has the following liabilities
Income taxes P8,000
Note payable (secured by land) 120,000
Accounts payable 83,000
Salary payable (evenly by two employees) 6,000
Bonds payable 70,000
Administrative expenses for liquidation 20,000
The company has the following assets
Particulars Book value Fair value
Current assets P80,000 P33,000
Land 100,000 90,000
Building and equipment 100,000 110,000
5. How much will the holders of notes payable collect following the liquidation?
a. P108,000 b. P83,000 c. P90,000 d. P120,000
6. Cebuano Company has had severe financial difficulties and considering the possibility of liquidation. At this time,
the company has the following assets (stated at net realizable value) and liabilities
Assets (pledged against debts of P70,000) P116,000
Assets (pledged against debts of P130,000) 50,000
Other assets 80,000
Liabilities with priority 42,000
Unsecured creditors 200,000
In liquidation, how much would be paid to the partially secured creditors?
a. P130,000 b. P50,000 c. P74,000 d. P200,000
When the Pasig Company filed for liquidation with Securities and Exchange Commission, it prepared the following balance
sheet:
Current assets (net realizable value, P50,000 P80,000
Land and building (fair value, P240,000) 200,000
Goodwill (fair value, 0) 40,000
Total assets P320,000
Accounts payable P160,000
Mortgage payable (secured by land and building) 200,000
Common stock 100,000
Retained earnings (deficit) (140,000)
Total P320,000

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 7. What is the estimated deficiency to unsecured creditors?
a. P70,000 b. P90,000 c. P120,000 d. P140,000

Statement of Realization

This is the report submitted to the bankruptcy court summarizing the transactions that happened during the liquidation of
the corporation. It reports the gains or losses incurred during the course of liquidation. It also includes additional assets
acquired and liabilities incurred during the course of liquidation.

1. Zero na Corp has been undergoing liquidation since January 1. As of March 31, its condensed statement of
realization and liquidation is presented below:
Assets:
Assets to be realized P95,000
Assets acquired 5,000
Assets realized 30,000
Assets not realized 42,000
Liabilities:
Liabilities liquidated 35,000
Liabilities not liquidated 31,850
Liabilities to be liquidated 65,000
Liabilities assumed 1,500
Revenues and expenses:
Sales on account (credit) 5,000
Purchases (debit) 1,500
Payment of expenses of trustee 7,500
Sales for cash 25,000
Interest on marketable securities 150
The net gain (loss) for the three-month period ending March 31 is
a. P7,200 b. (P7,200) c. P49,500 d. (P17,500)