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Topic Review Notes:

CORPORATE LIQUIDATION – a situation whereby a company or a debtor is in financial difficulty

and has no means to resolve its financial constraints. The process may be started by the
debtor filing a voluntary petition or by creditors filing an involuntary petition which entails
the process of an orderly realization of the debtor’s assets and payment of its liabilities to
debtors.

STATEMENT OF AFFAIRS
 This is a statement of financial condition that emphasizes liquidation values and provides
relevant information for the trustee in liquidating the debtor corporation. This is prepared as
of a specific date or at any given point in time. Assets are measured at expected net
realizable value and classified on the basis of its availability for fully secured, partially
secured, priority, and unsecured creditors. Liabilities are classified as priority, fully secured,
partially secured, and unsecured. Historical cost valuations are presented only for reference
purposes.

ASSETS
1. Assets Pledged to Fully Secured Creditors. These are assets with realizable values equal to,
or in excess of the liabilities for which they have been pledged as collaterals.
2. Assets Pledged to Partially Secured Creditors. These are assets with realizable values that
are less than the liabilities for which they have been pledged as collaterals.
3. Free Assets. These are assets not pledged to specific secured liabilities or pledged assets with
realizable values in excess of the amount needed to satisfy claims of secured creditors.

LIABILITIES
1. Unsecured Liabilities With Priority. These are liabilities that must be paid off before any
secured debts can be satisfied.
2. Fully Secured Liabilities. These are liabilities covered by a pledge of specific assets whose
realizable values equal to or in excess of such liabilities.
3. Partially Secured Liabilities. These are liabilities covered by a pledge of specific assets
whose realizable values are less than such liabilities.
4. Unsecured Liabilities Without Priority. These are liabilities which have no legal priority not
a security interest in specific assets. They are being paid-off ( prorated when there is an asset
deficiency ) after all priority and secured liabilities have been satisfied.

SHAREHOLDERS’ EQUITY

* The balances of the shareholders’ equity accounts depends on the amount of free assets available. If
there is deficiency of assets to satisfy unsecured creditors, all claims of equity holders are
extinguished. If there are still available free assets in excess of unsecured liabilities, shareholders can
share in any distributions.
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Corporate Liquidation
1. The estimated recovery of unsecured creditors without priority is equal
a. to the realizable value of the assets pledged plus the excess amount multiplied by the
estimated recovery percentage.
b. to the realizable value of the assets pledged minus the excess amount multiplied by the
estimated recovery percentage.
c. to their claims multiplied by the estimated recovery percentage.
d. any of these

2. The estimated recovery of partially secured creditors is equal to

a. the realizable value of the assets pledged plus the excess amount multiplied by the estimated
recovery percentage.
b. the realizable value of the assets pledged minus the excess amount multiplied by the
estimated recovery percentage.
c. their claims multiplied by the estimated recovery percentage.
d. any of these

3. If the total debits in the statement of realization and liquidation exceeds the total credits, there is
a. net gain for the period c. either a or b
b. net loss for the period d. none of these

4. “Assets to be realized” is placed on which side of a statement of realization and liquidation?

a. debit side, measured at realizable value
b. credit side, measured at book value
c. debit side, measured at book value
d. no side

5. “Assets realized” is placed on which side of a statement of realization and liquidation?

a. credit side, measured at realizable value
b. credit side, measured at actual net proceeds from sale
c. debit side, measured at book value
d. no side

6. “Liabilities not liquidated” is placed on which side of a statement of realization and liquidation?
a. debit side, measured at realizable value
b. credit side, measured at book value
c. debit side, measured at book value
d. no side

7. “Liabilities liquidated” is placed on which side of a statement of realization and liquidation?

a. credit side, measured at realizable value
b. credit side, measured at actual settlement amount
c. debit side, measured at book value
d. debit side, measured at actual settlement amount
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The next three questions are based on the following information:

Quitter Co. is undergoing liquidation. Relevant information follows:

Carrying
  amount Realizable value
Assets pledged with partially secured creditors 80,000 50,000
Free assets 220,000 160,000

  Expected settlement amount Amount unsecured

Liabilities with priority 16,000 -
Partially secured creditors 75,000 25,000
Unsecured creditors 155,000 155,000

8. What is the total amount available for payment of claims of unsecured creditors?
a. 210,000 c. 144,000
b. 160,000 d. 0

9. What is the estimated amount of liquidating dividend per peso claim?

a. 1.17 c. 0.88
b. 1.03 d. 0.80

10. What is the amount of deficiency to creditors?

a. 36,000
b. 144,000
c. 160,000
d. 180,000

11. BPI loaned P75,000 to Ilocos Company. The loan is secured by inventory with book value and
fair value of P50,000 and P30,000 respectively. What amount will the bank receive if unsecured
creditors receive 25% of their claims?