CORPORATE LIQUIDATION

Liquidation - is the termination of business operations or the winding up of affairs; a process by

which assets are converted into cash, liabilities are settled, and any remaining amount is
distributed to the owners.

Measurement bases under liquidation

➔ Realizable value (estimated selling price less costs of disposal) - assets
➔ Expected net settlement amount - liabilities

Statement of Affairs
➔ It is a statement of financial condition that emphasizes liquidation values and provides
relevant information for the trustee in liquidating the debtor corporation.

Captions commonly found in the statement of affairs

➔ 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 collateral.
➔ Assets Pledged to Partially Secured Creditors
◆ These are assets with realizable values that are less than the liabilities which
they have been pledged as security.
➔ Free Assets
◆ These are assets not pledged to specified secured liabilities or pledged assets
with a realizable value in excess of the amount needed to satisfy claims of
secured creditors.
➔ Unsecured Liabilities with Priority
◆ These are liabilities that must, by statute, be paid off before any secured debts
can be satisfied. Examples include payables for:
● administrative expenses (filing fees, attorney’s fees, referee’s fees,
trustee’s fees, and other direct costs of the insolvency proceedings)
● unpaid employee salaries and other benefits
● taxes and assessments
➔ Fully Secured Creditors
◆ These are liabilities covered by a pledge of specific assets of realizable value
equal to or in excess of such liabilities.
➔ Partially Secured Creditors
◆ These are liabilities covered by a pledge of specific assets of a realizable value
that is less than such liabilities.
➔ Unsecured Liabilities without Priority
◆ These liabilities have no legal priority nor a security interest in specific property.
They are paid off after all priority and secured liabilities have been satisfied,
except when there is an asset deficiency where such liabilities are pro-rated.

Statement of Deficiency
 ➔ It is usually prepared to accompany the statement of affairs to prove the deficiency to
unsecured creditors.
➔ It is where the losses and gains from realization and unrecorded adjustments to assets
and liabilities are summarized.

Statement of Realization and Liquidation

➔ It is an activity statement that is intended to show progress toward the liquidation of a
debtor’s estate.
DEBITS CREDITS
● Assets to be realized ● Assets realized
● Assets acquired ● Assets not realized
● Liabilities liquidated ● Liabilities to be liquidated
● Liabilities not liquidated ● Liabilities assumed
● Supplementary expenses ● Supplementary income

Items under a statement of realization and liquidation

➔ Assets to be realized
◆ It represents the total non-cash assets available for disposal as at the beginning
of the period which is measured at book value.
➔ Assets acquired (additional assets or new assets)
◆ It represents previously unrecorded assets that were recognized during the
period.
➔ Assets realized
◆ It represents the actual net proceeds from the conversion of non-cash assets into
cash during the period.
➔ Assets not realized
◆ It is the unsold non-cash assets as at the end of the period which is measured at
book value.
➔ Liabilities to be liquidated
◆ It represents the total liabilities to be settled as at the beginning of the period
which is measured at book value.
➔ Liabilities assumed (additional liabilities or new liabilities)
◆ It represents previously unrecorded liabilities that were recognized during the
period.
➔ Liabilities liquidated
◆ It represents the actual net settlement amounts of liabilities paid during the
period.
➔ Liabilities not liquidated
◆ It is the unpaid liabilities as at the end of the period which is measured at book
value.
➔ Supplementary expenses / income
◆ It is the income realized and expenses incurred during the period.
Note: Since the beginning and ending balances of the assets and liabilities and the additions
thereto are stated at book values, while disposals and settlements are stated at actual amounts,
a net gain or loss is recognized which represents the difference on the sale of assets and
settlement of liabilities during the period.

Order of priority of claimants of company assets subject to liquidation