Corporate Liquidation

Liquidation: Termination of business operations. It is a process by which:

1. The assets of the business are converted into cash
2. The liabilities of the business are settled
3. Any remaining amount is distributed to Owners

Common Cause of Corporate Liquidation

- Insolvency

Accounting and Reporting for Liquidation

- Quitting Concern rather than Going Concern

- Statement of Affairs: a statement which shows the liquidation value of the corporation.
a. Assets are measured at net realizable values and classified on the basis of
availability
b. Liabilities are measured at settlement value and classified on the basis of
priority

Asset:
1. Assets pledged to fully secured creditors
2. Assets pledged to partially secured creditors
3. Free assets

Liability:
1. Fully secured creditors
2. Partially secured creditors
3. Unsecured creditors with priority
4. Unsecured creditors without priority

Frequently Asked Questions

1. Percentage of recovery for unsecured creditors
2. Estimated deficiency to unsecured creditors
B Company has decided to seek liquidation after facing financial setbacks. The company’s
statement of financial position on this date shows the following.

Assets
Cash 100,000
Accounts Receivable 300,000
Inventory 450,000
Prepaid Expenses 10,000
Equipment-net 750,000
Land 1,500,000
Total Assets 3,110,000

Liabilities
Accounts Payable 350,000
Notes Payable 700,000
Bonds Payable 1,500,000
Total Liabilities 2,550,000

Shareholder's Equity
Ordinary Share Capital 450,000
Ordinary share Premium 500,000
Retained Earnings (390,000)
Total Shareholder's Equity 560,000

Additional Information:
1. The assets had the following net realizable values:
Accounts Receivable 120,000
Inventory 300,000
Equipment 400,000
Land 1,750,000
2. The inventories are used as collateral for the notes while the land is used as collateral
for the bonds. Interest accrued on the notes amounts to 150,000 while the interest
accrued on the bonds is 200,000.
3. Unrecorded claims against the company are as follows:
o Accrued salaries of 50,000
o Accrued taxes of 40,000

Determine the following:

1. Estimated recovery percentage for unsecured creditors
2. Estimated deficiency to unsecured creditors
3. How much would the creditor holding the notes payable receive upon settlement?