Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND SATELLITE CAMPUSES
BATAAN BRANCH

Accounting for Special

Transactions:
Corporate Liquidation
Topics Breakdown
Corporate Liquidation
1. Differentiate Corporate Liquidation and Partnership Liquidation
2. Differentiate Court Supervised Rehabilitation and Pre-negotiated Rehabilitation
3. Prepare Statement of Affairs
4. Prepare Statement of Realization and Liquidation
CORPORATE LIQUIDATION
CORPORATE LIQUIDATION
• According to Republic Act No. 10142, known as the Financial Rehabilitation and Insolvency Act of
2010 (FRIA) which took effect on July 18, 2010 a debtor is considered insolvent if it is unable to pay
its liabilities as they fall due in the ordinary course of business or has a liability greater than its
assets.

• The inability to make in due course is referred to as equity insolvency, while having total liabilities
that exceed the fair value of total assets is referred to as bankruptcy insolvency.

• A corporation that are insolvent in the equity sense may be able to avoid bankruptcy proceedings by
negotiating an agreement directly with the creditors which we call debt restructuring, while
Corporation that are insolvent in bankruptcy sense will ordinarily be reorganized or liquidated.

• A financially distressed individual may apply for

a. Suspension of Payments; or
b. Insolvency (bankruptcy)

• A financially distressed juridical person may apply for:

a. Court-supervised rehabilitation;
b. Pre-negotiated rehabilitation; or
c. An out of court restructuring agreement
TYPES OF CORPORATE REHABILITATION
Court Supervised Rehabilitation

 An insolvent debtor may file a verified petition for rehabilitation when approved by
 the owner in the case of a sole proprietor
 a majority of the partners in the case of partnership
 in the case of a corporation by a majority vote of the board of directors or trustees and authorized by the vote
of the stockholders representing at least two-thirds of the outstanding capital stock, or of the members' in a
stockholders' or members meeting duly called for the purpose.

 The petition must establish the insolvency of the debtor and the viability of its rehabilitation.

 The verified petition should contain the following;

• The name, business and principal address and other addresses of the debtor
• The nature of business and principal activities of the debtor, and the addresses where these activities are
conducted
• The history of the debtor
• The fact and the cause of debtor's insolvency
• The specific relief sought
• The ground upon which the petition is based
• All pending actions or proceedings by or against the debtors and the courts or tribunal where they are pending
• The treats or demands to enforce claims or liens against the debtors
• The manner by which the debtor may be rehabilitated and how such rehabilitation may benefit the general body
of creditors, employees and stockholders
• The exact addresses at which documents regarding the debtor and proceedings may be reviewed and copied.
TYPES OF CORPORATE REHABILITATION
Pre-negotiated Rehabilitation

 An insolvent debtor, by itself of jointly with any of its creditors, may file a verified petition with the court for the
approval of a pre-negotiated rehabilitation plan, together with the affidavit showing the written endorsement or
approval by creditors holding at least two-thirds of the total liabilities of the debtor, including secured creditors
holding more than 50 percent of the total secured claims and unsecured creditors holding more than 50 percent of
the total unsecured claims.

 The petition must contain the statement required in a petition for rehabilitation under court-supervised
rehabilitation proceedings and include the following documents:
• A schedule of debts and liabilities which lists all the creditors of the debtor
• An inventory of assets
• A summary of disputed claims against the debtor and a report on the provisioning of funds to account for
appropriate payments should any such claims be ruled valid or their amounts adjusted.
• An affidavit of general financial condition containing answers to the questions or matters prescribe in Annex A of
the FR.
• The pre-negotiated rehabilitation plan, including the names of at least three qualified nominees for
rehabilitation receiver (FR Rules rule 3, section 1).

 If the court finds the petition to be sufficient in form and substance, it will issue an order, which shall, among other
things:
• Declare that the debtor is under rehabilitation;
• Appoint a rehabilitation receiver, if provided under the plan; and
• Issue a stay or suspension order.
TYPES OF CORPORATE REHABILITATION
Out-of-Court or Informal Restructuring Agreement/Rehabilitation Plan

 This may be done if:

• The debtor agrees to the out-of-court or informal restructuring or workout agreement or
rehabilitation plan (OCRA)
• The agreement or-plan is approved by:
a. Creditors representing at least 67 per cent of the secured obligation
b. Creditors representing at least 75 per cent of the unsecured obligation
c. Creditors holding at least 85 per cent of the total liabilities, secured and unsecured

 The OCRA must be published once a week for at least three consecutive weeks in a newspaper of
general circulation in the Philippines
STATEMENT OF AFFAIRS
• An accounting statement that provides relevant information for a liquidating company is
referred as the statement of affairs. This statement is a legal document prepared for the
bankruptcy court.

• The statement of affairs is the financial statement that emphasizes liquidation values and
provides relevant information for the trustee in liquidating the debtor corporation. It also
provides information that may be useful to creditors and to the bankruptcy court.

• A statement of affairs prepared as of specific date, and is shows balance sheet information
with assets measured at expected net realizable values and classified on the basis of
availability for fully secured, partially secured, priority, and unsecured creditors. Liabilities
are classified in the statement of affairs as priority, fully secured, partially secured and
unsecured. Historical cost valuation are also included in the statement for reference
purposes.
STATEMENT OF AFFAIRS
ASSETS IN THE STATEMENT OF AFFAIRS

In the statement of affairs assets are ordinarily classified in groups and in the following order:

a. Asset Pledged with Fully secured creditors

• assets that have been pledged and that are expected to be realized in an amount
equal to or more than the amount of the claims on which they have been pledged.

b. Assets Pledged with Partially Secured Creditors

• assets that have pledged but that are expected to be realized at less than the amount
of the claims on which they have been pledged.

c. Free or Unpledged Assets

• assets that have not been pledged and are not related to individual liability terms.
STATEMENT OF AFFAIRS
LIABILITIES AND CAPITAL IN THE STATEMENT OF AFFAIRS

Liabilities are classified according to their legal priority and secured status and are followed by
capital items.

Liability and capital are normally classified in groups in the following order:

a. Preferred creditors
• claims that, by law, must be provided in full before anything may be paid to
remaining unsecured claims.

b. Fully secured Creditors

• claims that have been pledged certain assets that are expected to realize as much as
or more than the amount of claims.

c. Partially Secured creditors

• claims that have been pledged certain assets that are expected to realized less than
the amount of the claim
STATEMENT OF AFFAIRS
NOTES

NFA - Net Free Assets

• Free Assets
• Excess (Fully secured assets – Fully secured liabilities)
• Minus Liabilities WITH Priority

TULi w/o – Total Unsecured Liabilities without Priority

• Unsecured Liabilities WITHOUT Priority
• Excess (Partially secured liabilities – Partially secured assets)

Percentage of Recovery (POR) = NFA / TULi w/o

Estimated Recoverable Amount = TULi w/o x POR = NFA
Estimated Loss = TULi w/o – NFA
Estimated Recovery of Partially Secured Liabilities = Partially Secured Assets + (Excess Partially Secured Liabilities x
POR)
Estimated Recovery of Unsecured Liabilities WITHOUT Priority = Unsecured Liabilities x POR
STATEMENT OF AFFAIRS
ILLUSTRATION

The balance sheet of Stress Corporation at July 31, 2019 contains the following items:
ASSETS Additional Information:
Cash P 15,000 a. Land and building with net realizable value of P220,000 was pledge to
Accounts Receivable 175,000
mortgage payable
Investment at Fair Value 10,000
Inventories 100,000 b. Only P100,000 of the accounts receivable will be collected it was used
Prepaid expenses 10,000 as collateral to Notes payable -bank.
Land and building 200,000 c. The net realizable value of the following assets follows:
Equipment -net 60,000
Intangible assets 5,000 ASSETS NRV
Total Assets P 575,000 Investment at fair value P 19,000
Inventories 75,880
LIABILITIES & STOCKHOLDERS' EQUITY
Prepaid expenses -
P 116,000
Equipment -net 25,000
Accounts Payable
Intangible assets -
Wages payable 60,000
Property Taxes Payable 12,000
Notes Payable-supplier 90,000 Required:
Notes payable bank 120,000 1. Prepare a statement of affairs
Interest on notes payable-bank 10,000 2. Determine the estimated amount payable per peso of unsecured
Mortgage payable 200,000
Interest on Mortgage payable 5,000
non-priority liability.
Capital stock 200,000 3. Prepare a statement of Cash Receipts and Disbursement.
Retained earnings (238,000)
Total liabilities & stockholders' equity P 575,000
STATEMENT OF AFFAIRS
SOLUTION
STRESS CORPORATION
Statement of Affairs
July 31, 2019

Book Value ASSETS Realizable value Available to unsecured

Assets Pledge to Fully Secured Creditors:
200,000 Land and Building 220,000
Less: Mortgage Payable 200,000
Interest Payable 5,000 205,000 15,000
Assets Pledge to Partially Secured Creditors:
175,000 Accounts Receivable 100,000
Less: Notes Payable to bank 120,000
Interest payable 10,000 130,000 0
Free Assets:
15,000 Cash 15,000
10,000 Investment at FV 19,000
100,000 Inventories 75,880
10,000 Prepaid Expenses 0
60,000 Equipment-net 25,000
5,000 Intangible Assets 0
Total Available for preferred and unsecured creditors 149,880
Less: Preferred creditors (72,000)
Total Available for unsecured creditors 77,880
Est. deficiency 158,120
575,000 236,000
STATEMENT OF AFFAIRS
SOLUTION
STRESS CORPORATION
Statement of Affairs
July 31, 2019

Book Value LIABILITIES AND STOCKHOLDERS’ EQUITY Unsecured Creditors

Priority Liabilities:
60,000 Wages payable 60,000
12,000 Property Taxes payable 12,000
72,000
Fully Secured aliabilities:
200,000 Mortgage payable 200,000
5,000 Interest payable 5,000
205,000
Partially secured Liabilities:
120,000 Notes Payable-Bank 120,000
10,000 Interest payable 10,000
Total 130,000
Less: Accounts Receivable Pledged 100,000 30,000
Unsecured Liabilities
116,000 Accounts payable 116,000
90,000 Notes payable – Supplier 90,000
Stockholders’ + Equity
200,000 Capital Stock
(238,000) Retained Earnings
575,000 236,000
STATEMENT OF AFFAIRS
 Estimated amount available per peso of unsecured non-priority liability of the % of recovery =
77,880/236,000 = P.33 or 33 1/3%

GUIDE ON STATEMENT OF AFFAIRS SOLUTION

o BLUE – refers to ASSETS PLEDGED TO FULLY SECURED LIABILITIES as against to FULLY SECURED
LIABILITIES

o GREEN – refers to ASSETS PLEDGED TO PARTIALLY SECURED LIABILITIES as against to

PARTIALLY SECURED LIABILITIES

o ORANGE – refers to NET FREE ASSETS as against to LIABILITIES WITH PRIORITY

o VIOLET – refer to NET FREE ASSETS as against to (1) UNSECURED LIABILITIES and (2) Excess of
PARTIALLY SECURED LIABILITIES not covered by ASSETS PLEDGED to PARTIALLY SECURED
LAIBILITIES
STATEMENT OF CASH RECEIPTS AND DISBURESEMENT
• This statement shows the beginning balance of cash, the various sources of cash, such as collection of accounts
receivable, sales of assets and refund of prepaid items.
• It also shows the various uses of cash, like payment of various expenses and liabilities.
• All disbursements require the approval of the court. The statement should be a useful financial summary.

STRESS Company in Trusteeship

Statement of Cash receipts and Disbursements
From July 1-31 2019

Cash, July 1, 2019 P 15,000

Add: Cash Receipts
Sales – inventory P 75,880
Sales – Equipment 25,000
Sales – land & building 220,000
Sales – investment 19,000
Collection of receivable 100,000
Total cash receipts 439,880
Total cash available P 454,880
Less: Disbursements
Priority claims:
Wages P 60,000
Property Taxes 12,000 72,000
Mortgage Payable and interest 205,00
Notes payable – bank (secured) 100,000
Total cash disbursements 377,000
Cash balance, July 31 P 77,880
STATEMENT OF CASH RECEIPTS AND DISBURESEMENT
ILLUSTRATION
Philtel Company is in bankruptcy and is being liquidated by a court-appointed trustee. The financial report that follows was prepared by
the trustee just before the final cash distribution:
Required: Show how the P1,000,000 cash will be distributed to the holders
Cash P 1,000,000 of each claim.
Claims: Total cash available P 1,000,000
Mortgage payable secured by property that was 800,000 Unsecured clams with priority:
sold for P500,000 Adm expenses payable P 80,000
Unsecured accounts payable 500,000 Salaries payable 20,000 (100,000)
Administrative expenses payable 80,000 Partially secured liabilities
Salaries payable 20,000 Mortgage payable (500,000)
Interest payable -Mortgage payable 100,000 Balance – to unsecured creditors P 400,000

Unsecured creditors:
Mortgage payable P 400,000
Unsecured accounts payable 500,000
Total unsecured P 900,000
Percent recovery 400,000/900,000 44.44%

Distribution of the P1,000,000:

Unsecured claims with priority P 100,000
Partially secured creditors
NRV of collateral 500,000
Unsecured portion of mortgage
(400,000 x 44.44%) 177,778 677,778
Unsecured creditors without priority
(500,000 x 44.44%) 222,222
Total amount as distributed P 1,000,000
STATEMENT OF DEFICIENCY
This statement is prepared to accompany the Statement of Affairs. It summarizes the sources of deficiency such as:
• Losses on realization (net of gains on realization)
• Additional liabilities and liquidation expenses
• Losses to be borne by owners (total stockholders' equity)

ILLUSTRATION
The listings of assets and liabilities of Tribal Company on October 31, 2019, along with estimated realizable values, are given below:

Book values Est. realizable values Additional information:

Assets: 1) Accounts Receivable are pledged as
Cash P 240,000 P 240,000 security for the notes payable
Accounts Receivable – net 630,000 480,000 2) The mortgage payable is secured by
Inventories 600,000 530,000 the land and building
Equipment – net 450,000 180,000 3) Liquidating expenses are expected
Land and Building – net 750,000 420,000 to be P35,000
Other assets 30,000 - 4) Unrecorded liabilities amounting to
Total Assets P 2,700,000 P20,000 is to be recognized

Liabilities & Stockholders' Equity:

Accounts Payable 1,200,000 Required: Determine the following:
Notes payable 300,000 a. Total amount available to unsecured
Wages payable for the last 2 months 72,000 creditors
Taxes payable 228,000 b. % of recovery
Mortgage payable, including P15,000 accrued interest 615,000 c. Amount payable to partially secured
Capital Stock 900,000 creditors
Retained Earnings (615,000) d. Statement of Deficiency
Total Liabilities & Stockholders' Equity: P 2,700,000
STATEMENT OF DEFICIENCY
SOLUTION
Free Assets (b) Percent of recovery = 79,000/1,415,000 = 56.18%
Cash P 240,000
Accounts Receivable (480,000-300,000) 180,000
Inventories 530,000
Equipment 180,000
Land & Building (420,000-615,000) (d) Statement of Deficiency
Liquidating expenses (35,000)
Wages payable (72,000) Loss on Realization:
Taxes Payable (228,000) Accounts Receivable (630,000-480,000) 150,000
(a) Amount available to unsecured P 795,000 Inventories (600,000-530,000) 70,000
Equipment (450,000-180,000) 270,000
Unsecured creditors: Land & Building (750,000-420,000) 330,000
Accounts Payable 1,200,000 Other Assets 30,000
Mortgage payable 195,000 Total losses 850,000
Unrecorded liabilities 20,000 Unrecorded liabilities 20,000
Total amount unsecured P 1,415,000 Liquidation expenses 35,000
Total losses & exp P 905,000
Total deficiency P 620,000 Losses borne by the owners (Balance of Equity) (285,000)
Deficiency to unsecured creditors P 620,000
(c) Payable to partially secured creditors
Mortgage payable P 615,000 Proof:
Less: Land & building 420,000 Total unsecured creditors P 1,415,000
Unsecured portion 195,000 Amount available (795,000)
% of recovery 56.18 Deficiency P 620,000
Recoverable amount 109,558
FV of land & building 420,000
Total amount recoverable P 529,558
STATEMENT OF REALIZATION AND LIQUIDATION
• A statement of realization and liquidation is an activity statement that shows the progress toward the liquidation of
the debtor's estate.
• It also informs the bankruptcy court and interested creditors of the accomplishments of the trustee.
• Below are the classifications of assets and liabilities in the Statement of Realization and Liquidation.
ASSETS LIABILITIES
Assets to be realized: Assets Realized: Liabilities liquidated: Liabilities to be liquidated:
Book value of non-cash Net proceeds of assets old Paid liabilities Book value of liabilities
assets
(per balance sheet)
(from balance sheet)

Assets not Realized: Liabilities not liquidated: Liabilities assumed:

Assets Acquired:
Additions to assets during
the liquidation
period
ASSETS
If total debits are greater
than total credits, there is
loss on realization;
however, if total credits
are greater than total
debits, there is gain on
realization.
BV of unsold non-cash assets
at the end
of the period
REVENUE AND EXPENSE
Supplementary charges:
Purchases & Expenses
Unpaid liabilities at the end
of the
period
Supplementary Credits:
Sales and other revenues
Additional obligations
incurred
During the liquidation period
LIABILITIES
If total debits are greater
than total credits, there is
loss on realization;
however, if total credits
are greater than total
debits, there is gain on
realization.
STATEMENT OF REALIZATION AND LIQUIDATION
NOTES

Assets Acquired Liabilities Assumed

• Interest receivable • Interest payable
• Accounts receivable • Accounts payable

Assets Realized Supplementary Charges

• Inventory – at cost of sales • Cost of sales
• Property, plant, and equipment – net proceeds • Accrued expenses
• Accounts receivable – collection
Supplementary Credits
• Sales
• Accrued income

Assets = Liabilities + Equity

Cash Assets + Non-cash Assets = Liabilities + Equity
Cash Assets, beg + Assets TO BE Realized = Liabilities TO BE Liquidated + Ordinary Share Capital + Retained Earnings, beg
Cash Assets, end + Assets NOT Realized = Liabilities NOT Liquidated + Ordinary Share Capital + Retained Earnings, end
STATEMENT OF REALIZATION AND LIQUIDATION
ILLUSTRATION
Below is the statement of realization and liquidation of Stress Corporation which is under receivership, for the month ended July 31,
2019. Determine the net income or loss for the period.

Stress Corporation
Mr. Hopeless Receiver
Statement of Realization and liquidation
For the Month Ended July 31, 2019

ASSETS
Assets to be realized: Debits Assets realized: Credit
Investment at Fair value 16,000 Investment at Fair value 12,000
Accounts receivable 38,000 Account receivable 30,000
Merchandise Inventory 20,000
Assets acquired: Assets not realized:
Accounts receivable 10,000 Accounts receivable 5,000
Merchandise inventory 15,000
LIABILITIES
Liabilities liquidated: Liabilities to be liquidated:
Accounts payable 28,000 Accounts payable 45,000
Liabilities not liquidated: Liabilities assumed:
Accounts payable 10,000 Accounts payable 8,000
Accrued expenses 2,000
Supplementary charges: Supplementary credits:
Purchases 1,500 Sales on account 6,000
Expenses 7,500 Cash sales 20,000
Interest income 2,000
STATEMENT OF REALIZATION AND LIQUIDATION
SOLUTION

ASSETS Debits Credits Gain (loss)

Assets to be realized 74,000
Assets Acquired 10,000
Assets realized 42,000
Assets not realized 20,000
84,000 62,000 (22,000)
LIABILITIES & SUPPLEMENTARY ITEMS
Liabilities to be liquidated 45,000
Liabilities assumed 8,000
Liabilities liquidated 28,0000
Liabilities not liquidated 12,000
Supplementary credits 28,000
Supplementary charges 9,000
49,000 81,000 32,000
Total gain (loss) 10,000
TRUSTEESHIP
• In trusteeship, an independent body (called the trustee or receiver) is appointed by court to take over
the assets of the insolvent corporation to protect the equities and rights of all parties concerned.
• The transfer of assets to the trustee is recorded by both parties as follows: (Note: Only assets are
transferred to the books of the trustee. The original liabilities and the stockholders' equity accounts are
left on the company records.)

Debtor's Books:
Trustee's account 000
Allowance for doubtful accounts 000
Accum. Depreciation 000
Current Assets 000
Non-current assets 000
Trustee's Books:
Current Assets 000
Non-current assets 000
Allowance for DA 000
Accumulated depreciation 000
Debtor's account 000
TRUSTEESHIP
The Operations of the trustee are recorded as:

Transactions Trustee’s Books

a. Sales on account Accts. Receivable 000
Sales 000

b. Purchases on account Purchases 000

Accounts Payable 000

c. Collection of old accounts Cash 000

Accounts Receivable 000

d. Write off of uncollected old accounts Allowances for DA – old 000

DA – expense 000
Accts. Receivable – old 000

e. Collection of old note Receivable with interest Cash 000

Notes Receivable – old 000
Interest Revenue 000

f. Collection of new notes receivable Cash 000

Notes Receivable –old 000
Interest Revenue 000
TRUSTEESHIP
The Operations of the trustee are recorded as:

Transactions Trustee’s Books

g. Payment of old accounts and old notes payable with interest Corp. liability – AP – old 000
Corp. liability – NP – old 000
Interest Expense – Corp. 000
Cash 000

h. Payment of new accounts and notes payable Accounts Payable 000

Notes Payable 000
Interest expense 000
Cash 000

i. Sale of assets with gain Cash 000

Assets 000
Gain on sale – corp 000

j. Sale od assets with loss Cash 000

Loss on sale of assets – corp 000
Assets 000

k. Payment of operating expenses Expenses (in details) 000

Cash 000
TRUSTEESHIP
The Operations of the trustee are recorded as:

Transactions Trustee’s Books

l. Record year end adjusting entries the usual manner

m. Close nominal accounts to Income Summary accounts

n. Close the balance of income summary to Retained Earnings

1) Increase in Retained Earnings

Income Summary 000

2) Decrease in Retained Earnings Debtor’s account 000

Debtor’s account 000

Income Summary 000
o. Close Corp.’s liabilities paid accounts
Debtor Corporation - account 000
Corp. Liabilities – AP old 000
Corp. Liabilities – NP old 000

If the trustee is able to restore the financial solvency, the control of assets is returned to the former owners, however, if solvency cannot
be restored, then the corporation will be liquidated.
THANK YOU!