Chapter 06: Corporate Liquidation in Financial Difficulty

Financial Reports:
1. Statement of Affairs – report of the debtor
2. Statement of Realization and Liquidation – report of the receiver/trustee

STATEMENT OF AFFAIRS
Steps:
a) Classify assets and liquidations into categories:
ASSETS
Category Difference (effect)
Assets Pledged to Fully Secured ERV > Liability (+) Available for
Creditors unsecured creditors
Assets Pledged to Partially Secured ERV < Liability (-) Unsecured non
Creditors priority liabilities
Free Assets No security (+) Available for
unsecured creditors

Liabilities
Category Difference (effect)
Fully Secured Creditors ERV > Liability Liquidated
Partially Secured Creditors ERV < Liability (-) Unsecured non
priority liabilities
Unsecured with priority  Admin Expense
 Unpaid Salaries
 Unpaid Wages
 Benefit Plans
 Taxes
Unsecured without priority No security (-) Unsecured non
priority liabilities

FORMAT
Name of the Company
Statement of Affairs
Date
Available for
BV Assets ERV Unsecured Creditors
Pledge to fully secured creditors:
Pxx (Should itemize) Pxx
Less: Liabilities to fully secured creditors (xx) Pxx
Pledge to partially secured creditors:
xx (Should itemize) Pxx -
Free Assets
xx (Should itemize) Pxx xx
Total Free Assets xx
Less: Creditors with Priority (xx)
Net Free Assets xx
Estimated Deficiency (squeeze) xx
Pxx (amount should be based on the total unsecured nonpriority liabilities) Pxx

Unsecured Nonpriority
BV Liabilities and Stockholder’s Equity ERV Liabilities
Liabilities with Priority:
Pxx (Should itemize) Pxx
Fully Secured Liabilities:
xx (Should itemize) xx
Partially Secured Liabilities:
xx (Should itemize) xx
Less: Value of Pledged Assets (xx) Pxx
Unsecured Creditors:
xx (Should itemize) xx
xx Stockholders’ Equity -
Pxx Pxx

Other important figures:

1. Expected Recovery Percentage
Net free Assets / Unsecured Claims

2. Estimated Deficiency
Total Claims – Estimated Amounts to be recovered

Accounting and Reporting for Receiver/Trustee

Reports prepared:
1. Statement of cash receipts and cash disbursements
2. Statements of Realization and Liquidation

Steps:
1. Assumption of the estate (the trustee will take the custody of the corporate assets)
 Rules:
a. Record at book value (omit contra accounts)
2. Journalize the transactions and events during the first month of the company’s trusteeship in the
trustee’s books
3. Prepare Statement of Cash receipts and disbursements
OPTIONAL
4. Prepare Statement of Estate Equity (deficit)
5. Prepare Statement of Realization and Liquidation

FORMAT
Name of Company in Trusteeship
Statement of Cash Receipts and Disbursements in Trusteeship
From (start of the month) to (end of the month) 20xx
Cash Balance, Beginning P xx
Add: Cash Receipts
(Should itemize) P xx xx
Total
Less: Cash Disbursements
(Should itemize) P xx (xx)
Cash Balance, Ending P xx

Name of Company in Trusteeship

Statement of Estate Equity (deficit)
From (start of the month) to (end of the month) 20xx
Estate Equity, Beginning P xx
Adjustments (xx)
Adjusted Balance xx
Net gain (loss) on realization
(Should itemize) xx/(xx)
Total xx/(xx) xx/(xx)
Estate Equity (deficit), Ending P xx

Traditional Format
Name of Company in Trusteeship
Statement of Realization and Liquidation
From (start of the month) to (end of the month) 20xx
ASSETS
Assets to Be Realized: Assets Realized:
(should itemize) P xx (should itemize) P xx

Total P xx Total P xx
 Assets Acquired (new) Assets Not Realized
(should itemize) P xx (should itemize) P xx

LIABILITIES
Liabilities Liquidated: Liabilities to Be Liquidated:
(should itemize) P xx (should itemize) P xx

Total P xx Total P xx

Liabilities Not Liquidated: Liabilities Incurred (new)

(should itemize) P xx (should itemize) P xx

INCOME OR LOSS AND SUPPLEMENTARY ITEMS

Supplementary Expenses: Supplementary Revenues:
(Other Expenses) xx Net Loss xx

TOTAL P xx TOTAL P xx

Alternative Format
Name of Company in Trusteeship
Statement of Realization and Liquidation
From (start of the month) to (end of the month) 20xx
Estate Equity, Beginning P xx
Adjustments:
(Should itemize) P xx (xx)
Adjusted Balance xx
Assets Realized:
BV PROCEEDS GAIN/LOSS
(Should itemize) xx/(xx)
Liabilities Liquidated:
(Should itemize) xx
Total xx
 OTHER EXPENSES PAID (xx)
Estate Equity (deficit), Ending P xx

Closing Entries of the Books of the Trustees

Final Settlement of the remaining liabilities
1. Allocation Rate:
Remaining Cash Balance / Total Remaining Liabilities
Remaining Liability x Allocation Rate

Entry:
Liability
Cash

2. Remaining Balance Close to Estate Equity or deficit

Equity:
Estate Equity XX
Liability XX

Deficit:
Liability XX
Estate Deficit XX