05/06/2022

CHAPTER 5
Corporate Liquidation and
Reorganization

CHAPTER 5
Corporate Liquidation and Reorganization

After discussing this chapter, you should be able to:

➢ Describe the accounting for non-going concern
entities
➢ Prepare the statement of affairs.

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Insolvency Act of the Philippines, either:

➢ Voluntary insolvency
➢ Involuntary insolvency

Possible recourse:
➢ Liquidation
➢ Reorganization

Corporate liquidation

It is a process by which
1) The assets of the business are converted into cash.
2) The liabilities of the business are settled, and
3) Any remaining amount is distributed to the owners.

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Measurement basis

PFRS – “going concern”

- measurement basis, Conceptual Framework
- PFRS, do not apply to liquidation entities
Realizable value – for entities undergoing liquidation
• Assets = Estimated selling price less estimated cost to sell
• Liabilities = the expected net settlement amount

Financial reports

1) Statement of affairs
2) Statement of realization and liquidation

May also be prepared

1) Note disclosures
2) Summary of cash receipts and disbursements

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Statement of affairs
Assets are classified into the following:
1) Assets are pledged to fully secured creditors
2) Assets pledged to partially secured creditors
3) Free assets

Liabilities are classified into the following:

1) Unsecured liabilities with priority
2) Fully secured creditors
3) Partially secured creditors
4) Unsecured liabilities without priority

Preparation and Format of the Statement of Affairs

The liabilities and capital side of the statement of affairs have columns to show (1) the book value of the
liability or capital item, (2) the name of the liability or capital item, and (3) the amount of the liability
that is unsecured.

The Statement of Affairs commonly appears in the format shown:

Folded Company
Statement of Affairs
Date
Book Estimated
Value Assets Realizable Values Free Assets
Assets Pledge to Fully Secured Creditors:
P xx (itemized) . . . . . . . . . . . . . . . . . . . . . . . . . . P xx
Less: Liabilities to Fully Secured Creditors . . . . . xx P xx
Assets: Pledged to Partially Secured
xx Creditors: (itemized) . . . . . . . . . . . . . . . . . P xx
xx Free Assets: (itemized) . . . . . . . . . . . . . . . . . . . . P xx xx
Total Free Assets . . . . . . . . . . . . . . . . . . . . . . . . . P xx
Less: Unsecured Liabilities with Priority . . . . . . . xx
Net Free Assets . . . . . . . . . . . . . . . . . . . . . . . . . . P xx
Estimated deficiency to Unsecured Creditors
____ (to balance) . . . . . . . . . . . . . . . . . . . . . . . . _ xx
P xx Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P xx
Book
Value Liabilities and Equity Creditors' Claims Unsecured Liabilities
P xx Fully Secured Creditors: (itemized) . . . . . . . . . . P xx
xx Partially Secured Creditors: (itemized) . . . . . . . P xx
Less: Value of Pledge Assets . . . . . . . . . . . . . . . xx P xx
xx Unsecured Creditors with Priority: (itemized). . P xx
xx Unsecured Creditors: (itemized) . . . . . . . . . . . . xx
xx Stockholders' Equity
P xx Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P xx

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Illustration 15-1: Statement of Affairs

Goes Out Company, which filed a voluntary bankruptcy petition on August 1, 2021, had the following information regarding
liquidation and realizations are as follows:
1. Receivables. The notes and accounts receivable are considered to have been adequately provided for in preparing
the balance sheet; thus the company expects to realize the amounts shown.
2. Finished goods. The finished goods can be sold for ₽12,000; however, the company expects to incur ₽1,000 of direct
selling and shipping costs.
3. Work in process. The work in process can be completed if ₽500 of direct costs are incurred for labor. On completion, this
inventory can be sold for ₽17,000; however, the company expects to incur ₽1,500 of direct selling and shipping costs.
4. Raw materials. The raw materials can be converted into finished goods if ₽1,200 of direct costs are incurred for labor. On
completion, this inventory can be sold for ₽9,000; however, the company expects to incur ₽1,800 of direct selling and
shipping costs.
5. Supplies. The supplies will be substantially consumed in the completion of work in process and the conversion of raw
materials into finished goods. The estimated realizable value of the remaining supplies after completion and conversion
is ₽500.
6. Prepayments. The prepayments are expected to expire the liquidation period.
7. Land. The land has a current market value of ₽37,500.
8. Building. The building has a current market value of ₽57,500.
9. Equipment. The equipment can be sold at auction for an estimated ₽14,000.
10. Patents completely written-off the books in past years but with a realizable value of ₽10,375.
11. The books do not show accrued employee benefits amounting to ₽3,000. Liquidation expenses. The company estimates
that ₽7,500 in court and filing fees, appraisal fess, and legal and accounting fees will be incurred in connection with the
liquidation.
12. Accounts payable. Accounts payable include ₽3,000 to the company’s attorney for legal work incurred in connection
with patent research and collection efforts on certain accounts receivable that have been written off. Accounts
payable also include ₽2,500 owed to the company’s certified public accountants in connection with the December 31,
2020, audit of the company’s financial statements.

The balance sheet of Goes Out Company is presented as follows:

Goes Out Company
Balance Sheet
August 1, 2021
Assets
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 1,000
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500
Inventory:
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____4,000
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 77,500
Non-current Assets:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 35,000
Building, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000
Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____7,500
Total Non-current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 127,500
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 205,000

Liabilities and Stockholders’ Equity

Current Liabilities
Notes payable to bank, secured by accounts receivable . . . . . . . ₽ 17,500
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,500
Accrued liabilities
Interest (₽1,000 to bank, ₽3,000 to insurance company). . . . . . 4,000
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____1,000
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 72,500
Non-current Liabilities
Notes payable to insurance company, secured by land and
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___87,500
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 160,000
Stockholders’ Deficiency
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 50,000
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 5,000)
Total Stockholders’ Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 45,000
Total Liabilities and Stockholders’ Deficiency . . . . . . . . . . . . . . . . . . . ₽ 205,000

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Information for the statement of affairs as derived from the balance sheet presented above at the filing date and other sources, such as
appraisals of the assets’ expected realizable values and contractual agreements with creditors are:
Goes Out Company
Statement of Affairs
August 1, 2021
Estimated
Estimated amount available
Book Value Assets Realizable Values / Free Assets
Assets Pledge to Fully Secured Creditors:
₽ 35,000 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 37,500
55,000 Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,500
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 95,000
Less: Liabilities to Fully Secured Creditors (contra)
Notes payable to Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 87,500
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 90,500 ₽ 4,500
Assets: Pledged to Partially Secured Creditors:
12,500 Accounts receivable (deducted contra) . . . . . . . . . . . . . . ₽ 12,500
Free Assets:
1,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 1,000
2,500 Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
20,000 Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000
25,000 Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
10,000 Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
2,500 Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
4,000 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
30,000 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
7,500 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,375 60,375
Total Free Assets/Total estimated amount available . . . . . . . . ₽ 64,875
Less: Unsecured Liabilities with Priority (contra) . . . . . . . . . . . . 15,000
Net Free Assets/Total amount available for unsecured
liabilities without priority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 49,875
________ Estimated deficiency to Unsecured Creditors (to balance) 2,625
₽205,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 52,500

Book Value Liabilities and Equity Creditors' Claims

Fully Secured Creditors:
₽ 87,500 Notes payable to Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 87,500
3,000 Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Total (deducted contra) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 90,500
Partially Secured Creditors:
17,500 Notes payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 17,500
1,000 Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 18,500
Less: Value of Pledge Assets
Accounts receivable (contra) . . . . . . . . . . . . . . . . . . . . . . . . 12,500 ₽ 6,000
Unsecured Creditors with Priority:
3,500 Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 3,500
1,000 Payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
3,000 Accrued employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
7,500 Estimated liquidation expenses . . . . . . . . . . . . . . . . . . . . . . . 7,500
Total Unsecured Creditors with Priority
(deducted contra) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 15,000
Unsecured Creditors without Priority:
46,500 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,500
45,000 Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _______
₽205,000 Total Unsecured Creditors without Priority . . . . . . . . . . . . . . . . . ₽ 52,500

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Estimated Recovery Percentage of Unsecured Creditors without Priority (Dividend to General Unsecured Creditors
without Priority)

The statement of affairs shows the total amount available for unsecured liabilities without priority (or net free assets)
of ₽49,875 and total unsecured creditors without priority of ₽52,500, resulting to an estimated deficiency to unsecured
creditors of ₽2,625.

This deficiency represents the extent to which the net realizable value of such assets exceeded the creditors’ claims
the excess would be available to satisfy the claims of owners/stockholders.

Of interest to the general unsecured creditors without priority is a ratio that is referred to as estimated recovery
percentage or dividend to general unsecured creditors. This ratio is computed as follows:
Estimated recovery percentage/ Net Free Assets
dividend to general unsecured =
creditors Total Unsecured Creditors Without Priority
The dividend is an estimate of how much will be received by general unsecured creditors without priority for each
peso owed to them, and it is expressed either in absolute amount or in percentage form.

The approximate dividend for general unsecured creditors for Goes Out Company will be computed as follows:

₽49,875
= ₽0.95 on one peso, or 95%
₽52,500

Estimated Amounts to be recovered by Each Class of Creditors

By reference to the statement of affairs, the accountant for the trustee in bankruptcy for Goes Out
Company may prepare the summary of estimated amounts to be recovered by each class of creditors
shown below:

Goes Out Company

Estimated Amounts to be Recovered by Creditors
August 1, 2021
(b) (c) - (b)/(a)
(a) Estimated Percentage of
Class of Creditors Amount of Claims Payment/Recovery Recovery
Fully Secured . . . . . . . . . . . . . . . . . . . . . . . . ₽ 90,500 ₽ 90,500 100%
Partially Secured . . . . . . . . . . . . . . . . . . . . 18,500 18,200* 98%
Unsecured with priority . . . . . . . . . . . . . . . . 15,000 15,000 100%
Unsecured without priority . . . . . . . . . . . . 46,500 44,175** 95%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽170,500 ₽167,875***

*₽12,500 + (₽6,000 x (95%)

**₽46,500 x 95%
***This amount can be computed also be summing up the estimated realizable value of all assets. Thus, ₽1,000 + ₽2,500 + ₽12,500 +
₽11,000 + ₽15,000 + ₽6,000 + ₽500 + ₽37,500 + ₽57,500 + ₽14,000 + ₽10,375 = ₽167,875.

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Statement of Deficiency

A deficiency statement is usually prepared to accompany the statement of affairs to prove the deficiency to
unsecured creditors. It shows the causes of this deficiency by summarizing losses and gains from realization and
unrecorded adjustments to assets and liabilities. The following is the deficiency statement of Goes Out Company:
Goes Out Company
Statement of Deficiency
August 1, 2021

Estimated losses on realization of assets:

Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 9,000
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __7,500 ₽ 52,500
Additional liabilities:
Accrued employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 3,000
Estimated liquidation expenses . . . . . . . . . . . . . . . . . . . . . . . . __7,500 __10,500
Estimated gross loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 63,000
Less:
Estimated gains on realization of assets:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 2,500
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Additional assets:
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _10,375 __15,375
Estimated net loss ₽ 47,625
Less: Loss to be absorbed by stockholders:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 50,000
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( _5,000) __45,000
Estimated deficiency to unsecured creditors
(loss to be absorbed by unsecured creditors) . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 2,625

Another Illustration:
ABC Co. has filed for voluntary insolvency and is about to liquidate its business. ABC’s statement of
financial position immediately prior to the liquidation process is shown below:
ABC COMPANY
Statement of Financial Position
As of December 31, 2021

ASSETS LIABILITIES AND EQUITY

Current Assets Current Liabilities
Cash 40,000 Accrued Expenses 221,000
Accounts Receivable 220,000 Current Tax Payable 350,000
Notes Receivable 100,000 Accounts Payable 1,000,000 1,571,000
Inventory 530,000
Prepaid Assets 10,000 900,000 Noncurrent Liabilities
Notes Payable (secured by equipt.) 300,000
Loans Payable (secured by land & bldg) 2,000,000 2,300,000
Noncurrent Assets
Land 500,000 Capital Deficiency
Building, net 2,000,000 Share Capital 500,000
Equipment, net 300,000 2,800,000 Retained Earnings (deficit) (671,000) (171,000)
Total Assets 3,700,000 Total Liabilities and Equity 3,700,000

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The following additional information was determined before the

commencement of the liquidation process:
a) Only 76% of the accounts receivable is collectible.
b) The note receivable is fully collectible. An accrued interest
receivable of ₱10,000 was not yet recorded.
c) The inventory has an estimated selling price of ₱420,000 and
estimated costs to sell of ₱10,000.
d) The prepaid assets are non-refundable.
e) The land and building have fair values of ₱2M and ₱800K,
respectively. However, ABC Co. expects to sell both the land
and building for a total selling price of ₱2.6M. Costs to sell the
land & building are negligible as the prospective buyer agrees
to shoulder all necessary costs of transferring title to the
property.
f) The equipment is expected to be sold at a net selling price of
₱200K.

The following additional information was determined before the

commencement of the liquidation process:
g) Administrative expenses expected to be incurred during the
liquidation process is ₱30K. This amount is not yet reflected on
the statement of financial position.
h) Accrued expenses include accrued salaries of ₱25K.
i) Accrued interest on the loan payable amounting to ₱15K was
not reflected in the statement of financial position.
j) All of the other liabilities are stated at their expected
settlement amounts.

Required: Prepare the statement of affairs as of January 1, 2022.

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Solution:
Step#1: Restate assets and liabilities to realizable values

Book Realizable
values values
Cash 40,000 40,000
Accounts receivable 220,000 (220K x 76%) 167,200
Note receivable 100,000 100,000
Interest receivable - 10,000
Inventory 530,000 (420K - 10K) 410,000
Prepaid assets 10,000 -
Land and building 2,500,000 2,600,000
Equipment, net 300,000 200,000
Total assets 3,700,000 3,527,200

Solution:
Step#1: Restate assets and liabilities to realizable values
Book Realizable
values values
Accrued expenses 221,000 221,000
Current tax payable 350,000 350,000
Accounts payable 1,000,000 1,000,000
Note payable 300,000 300,000
Loan payable 2,000,000 2,000,000
Interest payable - 15,000
Est. admin expenses - 30,000
3,871,000 3,916,000
Estimated
deficiency
Capital deficiency (171,000) (bal. figure) (388,800)
Total liabilities & equity 3,700,000 3,527,200

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Solution:
Step#2: Identify the classifications of assets and liabilities
Assets pledged to fully secured Realizable Available for unsecured
creditors: value creditors
Land and building 2,600,000
Less: Loan payable (2,000,000)
Interest payable (15,000) 585,000

Assets pledged to partially

secured creditors:
Equipment, net 200,000

Free assets:
Cash 40,000
Accounts receivable 167,200
Note receivable 100,000
Interest receivable 10,000
Inventory 410,000
Prepaid assets - 727,200
Total free assets 1,312,200

Solution:
Step#2: Identify the classifications of assets and liabilities
Unsecured liabilities with Secured and Unsecured liabilities
priority: Priority claims without priority
Estimated admin. Expenses 30,000
Accrued salaries 25,000
Current tax payable 350,000
Total unsecured liabilities
with priority 405,000 -

Fully secured creditors:

Loan payable 2,000,000
Interest payable 15,000
2,015,000 -

Partially secured creditors:

Note payable 300,000
Less: Equipment (200,000) 100,000

Unsecured liabilities without

priority:
Accrued expenses, net of
accrued salaries (221K-25K) 196,000
Accounts payable 1,000,000 1,196,000
Total unsecured liabilities without priority 1,296,000

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Solution:
Step #3: (Optional) Estimated recovery percentage

Estimated recovery percentage Net free assets

of unsecured creditors without =
priority Total unsecured liabilities without priority

Total free assets 1,312,200

Less: Total unsecured liabilities with priority (405,000)
Net free assets 907,200
Divide by: Total unsecured laibilities without priority 1,296,000
Estimated recovery percentage of unsecured
creditors without priority 70%

Solution:
Step #3: (Optional) Estimated recovery percentage

Total Recovery Estimated

claims percentage recovery
Unsecured liabilities with
priority 405,000 100% 405,000
Fully secured creditors 2,015,000 100% 2,015,000
Partially secured creditors 300,000 200K + (100K x 70%) 270,000
Unsecured liabilities without
priority 1,196,000 70% 837,200
Shareholders none 0% -
Total assets at realizable values 3,527,200

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Solution:
Step #3: (Optional) Estimated recovery percentage

Partially secured creditors 300,000

Less: Realizable value of collateral security - equipment (200,000)
Unsecured portion of claim 100,000
Multiply by: Estimated recovery percentage 70%
Total 70,000
Add back: Realizable value collateral security 200,000
Estimated recovery 270,000

Solution:
Step #3: (Optional) Estimated recovery percentage

Alternative solution: Estimated recovery

Total assets at realizable values 3,527,200
Less: Unsecured creditors with priority (405,000)
Fully secured creditors (2,015,000)
Realizable value of asset pledged to partially
secured creditors (equipment) (200,000)
Net free assets 907,200

Unsecured creditors without priority 1,196,000

Defiency of assets pledged to partially secured creditors
(200K equipment - 300K note payable) 100,000
Total unsecured liabilities without priority 1,296,000

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ABC Company
Statement of Affairs Solution:
As of January 1, 2022 Step #4: Statement of
Book Realizable Available for affairs
ASSETS
values values unsecured creditors
Assets pledged to fully secured creditors:
2,500,000 Land and building 2,600,000
Loan payable (2,000,000)
Interest payable (15,000) 585,000

Assets pledged to partially secured creditors:

300,000 Equipment, net 200,000
Note payable (300,000) -

Free assets:
40,000 Cash 40,000
220,000 Accounts receivable 167,200
100,000 Note receivable 100,000
- Interest receivable 10,000
530,000 Inventory 410,000
10,000 Prepaid assets - 727,200
Total free assets 1,312,200
Less: Unsecured liabilities with
priority (see below) (405,000)
Net free assets 907,200
Estimated deficiency (squeeze)
(1,296,000 - 907,200) 388,800
3,700,000 1,296,000

Book Realizable Unsecured non- Solution:

LIABILITIES AND EQUITY
values values priority liabilities Step #4: Statement of
-
Unsecured liabilities with priority:
Administrative expenses 30,000
affairs
25,000 Accrued salaries 25,000
350,000 Current tax payable 350,000
Total unsecured liabilities with
priority 405,000 -

Fully secured creditors:

2,000,000 Loan payable 2,000,000
- Interest payable 15,000 -

Partially secured creditors:

300,000 Note payable 300,000
Equipment, net (200,000) 100,000

Unsecured creditors:
Accrued expenses, net of
196,000 accrued salaries 196,000
1,000,000 Accounts payable 1,000,000 1,196,000
Total unsecured creditors 1,296,000

(171,000) Shareholders' equity - -

3,700,000 1,296,000

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Statement of Realization and Liquidation

Debits Credits
Assets to be realized, excluding cash Assets realized
Assets acquired Assets not realized

Liabilities liquidated Liabilities to be liquidated

Liabilities not liquidated Liabilities assumed

Supplementary expenses Supplementary income

T-account

Asset account
Debits Credits
Beg. Bal. - Assets to be
realized, excluding cash xx
Addition - Assets acquired xx xx Disposals - Assets realized
xx End. Bal. - Assets not realized

Liability account
Debits Credits

Decreases - Liabilities xx Beg. Bal. - Liabilities to be liquidated

liquidated xx xx Additions - Liabilities assumed
End. Bal. - Liabilities not
liquidated xx

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Illustration 15-2: Statement of Realization and Liquidation

On August 1, 2021, the following information was available from the statement of affairs of Goes Out
Company:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 1,000
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500
Building, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,500
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,375
Notes payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500

Interest payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,500
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Notes payable to insurance company . . . . . . . . . . . . . . . . . . . . . . . . . 87,500
Interest payable to insurance company . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Accrued employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Estimated liquidation expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Estate deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2,625)

For the next four months, the following transactions occur:

1. The following inventories were sold: finished goods at ₽20,000; work-in-process at
P18,000, and raw materials at ₽4,500
2. Supplies were sold at ₽100
3. Equipments were disposed at ₽8,300.
4. Payment of accrued employee benefits of ₽2,500.
5. Estimated liquidation expenses of ₽7,500 were paid.
6. Other expenses in relation to liquidation were paid amounting to ₽800.
7. Payment of accounts payable amounting to ₽10,000 as full settlement for the book
value of ₽6,300 and the balance remains unpaid.
8. Partial payment of notes payable – bank amounting to ₽6,000 principal and P1,000
interest.
9. Salaries and wages paid, ₽3,500.
10.Partial payment of notes payable – insurance company amounting to ₽7,500 principal
and ₽3,000 interest.
11.Furniture and fixtures acquired amounting to ₽10,000.

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One way of presenting statement of realization and liquidation that should be more useful to the bankruptcy court than the
traditional balance sheet is presented below:

Goes Out Company

Statement of Realization and Liquidation
For the Four Months ended, November 30, 2021
Estate deficit, August 1, 2021 . . . . . . . . . ₽ 2,625
Assets Realized:
Realization Current Fair
proceeds Value Loss or (gain)
Finished goods . . . . . . . . . . . . . . . . . . ₽ 20,000 ₽ 11,000 ₽( 9,000)
Work-in-process . . . . . . . . . . . . . . . . . . 18,000 15,000 ( 3,000)
Raw materials . . . . . . . . . . . . . . . . . . . 4,500 6,000 1,500
Supplies . . . . . . . . . . . . . . . . . . . . . . . . 100 500 400
Equipment . . . . . . . . . . . . . . . . . . . . . . 8,300 14,000 5,700
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 50,900 ₽ 46,500 ( 4,400)
Liquidated:
Liabilities: Payment Book value Loss or (gain)
Accrued employee benefits . . . . . ₽ 2,500
Salaries and wages . . . . . . . . . . . . . 3,500
Estimated liquidation expenses . . . 7,500
Accounts payable . . . . . . . . . . . . . 10,000 ₽ 6,300 ₽ 3,700
Notes payable to bank . . . . . . . . . 7,000
Notes payable to insurance . . . . . 10,500
Totals . . . . . . . . . . . . . . . . . . . . . . . . ₽ 41,000
Expenses:
Other liquidation expenses . . . . . . 800 4,500
Estate deficit, November 30, 20x4 . . . . ₽ 2,725

The emphasis of this approach is to highlight two important aspects:

1. The gain or loss on assets realization and liquidation of liabilities and expenses; and
2. The estate deficit arising from the realization and liquidation procedures.

The fact that various bankruptcy courts are accepting alternative forms of the statement of realization and liquidation, it
may create some worry for accountants providing professional services.

In the statement of realization and liquidation presented below, net loss of ₽100 is arrived as the difference between the sub-totals for the left-hand and the right-hand sides of the
statement (and not based only on the supplementary debits and credits):

Goes Out Company

Statement of Realization and Liquidation
For the Four Months ended, November 30, 2021
Assets to be Realized: Assets Realized:
Notes receivable ₽ 2,500 Finished goods ₽20,000
Accounts receivable, net 12,500 Work-in-process 18,000
Finished goods 11,000 Raw materials 4,500
Work in process 15,000 Supplies 100
Raw materials 6,000 Equipment __8,300 ₽ 50,900
Supplies 500 Assets Not Realized:
Land 37,500 Notes receivable ₽ 2,500
Building, net 57,500 Accounts receivable, net 12,500
Equipment 14,000 Land 37,500
Patents _10,375 ₽166,875 Building, net 57,500
Assets acquired : Patents 10,375
Furniture and fixtures 10,000 Furniture and fixtures _10,000 130,375
Liabilities Liquidated:
Accrued employee
benefits ₽ 2,500 Liabilities to be Liquidated:
Estimated liquidation Notes payable to bank ₽17,500
Expenses 7,500
Accounts payable 10,000 Interest payable to bank 1,000
Salaries and wages 3,500 Accounts payable 46,500
Notes payable to bank 7,000 Salaries and wages 3,500
Notes payable to Payroll taxes 1,000
Insurance company _10,500 41,000
Notes payable to
Liabilities Not Liquidated: insurance company 87,500
Accounts Interest payable to
Payable ₽40,200 insurance company 3,000
Notes payable to Accrued employee
Bank 11,500 benefits 3,000
Notes payable to Estimated liquidation
Insurance company 80,000 Expenses __7,500 170,500
Accrued employee
benefits 500 Liabilities Assumed: 0
Payroll taxes _1,000 133,200 Supplementary Credits 0
Supplementary Debits:
Other liquidation
Expenses _____800 ________
Sub-total ₽351,875 Sub-total ₽351,775
________ Net loss ____100
Total ₽351,875 Total ₽351,875

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If financial statements are prepared to accompany the statement of realization and liquidation, the balance sheet balance as
presented in next page is prepared by analyzing first the different sections such as the cash balance, assets not realized, liabilities not
liquidated and the estate deficit.

Goes Out Company

Balance Sheet
November 30, 2021
Assets

Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 100
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __12,500
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 15,100
Non-current Assets
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 10,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500
Buildings, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,500
Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___10,375
Total Non-current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 115,375
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 130,475
Liabilities and Stockholders’ Equity
Current Liabilities
Accrued employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 500
Payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,200
Notes payable to bank, secured by accounts receivable . . . . . . . 11,500
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 53,200
Non-current Liabilities
Notes payable to insurance company, secured by land and
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __80,000
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽133,200
Estate deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2,725)
Total Liabilities and Deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 130,475

The cash balance on November 30 is computed as follows:

Cash balance, August 1, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 1,000
Add: Cash receipts from sale of -
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 20,000
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,300 __50,900
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 51,900
Less: Cash payments/disbursements:
Accrued employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 2,500
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Estimated liquidation expenses . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Notes payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Notes payable to insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,500
Other liquidation expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 __51,800
Cash balance, November 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 100

Alternatively, the ending cash balance may be computed as follows:

Estate deficit, November 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ ( 2,725)

Liabilities Not Liquidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __133,200
Total Liabilities and Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 130,475
Less: Assets Not Realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __130,375
Cash, November 30, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 100

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The income statement is prepared by analyzing the different sections wherein the causes of the net loss
are computed. The income statement is prepared to prove the amount of net loss as computed:

Goes Out Company

Income Statement
For Four Months Ended, November 30, 2021
Realization Current Fair
Losses (gains) assets on realizations: proceeds Value Loss or (gain)
Finished goods . . . . . . . . . . . . . . . . . . . ₽ 20,000 ₽ 11,000 ₽( 9,000)
Work-in-process . . . . . . . . . . . . . . . . . . 18,000 15,000 ( 3,000)
Raw materials . . . . . . . . . . . . . . . . . . . 4,500 6,000 1,500
Supplies . . . . . . . . . . . . . . . . . . . . . . . . 100 500 400
Equipment . . . . . . . . . . . . . . . . . . . . . . 8,300 14,000 5,700 ₽( 4,400)
Loss (gain) on liabilities liquidated:
Accounts payable . . . . . . . . . . . . . . . ₽ 10,000 ₽ 6,300 ₽ 3,700 3,700
Expenses during course of realization
and liquidation . . . . . . . . . . . . . . . . . . _____800
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 100

A modified version of the traditional or the conventional form may also be prepared. Under this version,
the realization of assets may occur which gives rise to gains and losses.

The realization activities may be presented as follows:

Assets (except Cash)

Assets to be realized Assets realized

Assets acquired Assets not realized

Income Effect of Realization

Expense and losses Revenues and gains

The liquidation of expenses and liabilities may result to a gain or loss which may be presented as follows:
Liabilities

Liabilities liquidated Liabilities to be liquidated

Liabilities not liquidated Liabilities incurred

Income Effect of Realization

Expense and losses Revenues and gains

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Following is the modified version of the conventional or traditional approach of statement of realization for Goes Out Company:

Goes Out Company

Statement of Realization and Liquidation
For the Four Months ended, November 30, 2021
Assets to be Realized: Assets Realized:
Notes receivable ₽ 2,500 Finished goods ₽20,000
Accounts receivable, net 12,500 Work-in-process 18,000
Finished goods 11,000 Raw materials 4,500
Work in process 15,000 Supplies 100
Raw materials 6,000 Equipment __8,300 ₽ 50,900
Supplies 500 Assets Not Realized:
Land 37,500 Notes receivable ₽ 2,500
Building, net 57,500 Accounts receivable, net 12,500
Equipment 14,000 Land 37,500
Patents _10,375 ₽166,875 Building, net 57,500
Assets acquired : Patents 10,375
Furniture and fixtures 10,000 Furniture and fixtures _10,000 130,375
Liabilities Liquidated: Liabilities to be Liquidated:
Accrued employee Notes payable to bank ₽17,500
benefits ₽ 2,500
Estimated liquidation Interest payable to bank 1,000
Expenses 7,500
Accounts payable 10,000 Accounts payable 46,500
Salaries and wages 3,500 Salaries and wages 3,500
Notes payable to bank 7,000 Payroll taxes 1,000
Notes payable to Notes payable to
Insurance company 10,500 insurance company 87,500
Accrued other Interest payable to
Liquidation expenses ___800 41,800 insurance company 3,000
Accrued employee
Liabilities Not Liquidated: benefits 3,000
Accounts Estimated liquidation
Payable ₽40,200 Expenses __7,500 170,500
Notes payable to bank 11,500 Liabilities Assumed:
Notes payable to Accrued other
Insurance company 80,000 liquidation expenses 800
Accrued employee Loss on Realization /
benefits 500 Liquidation:
Payroll taxes _1,000 133,200 Raw materials ₽ 1,500
Gain on Realization: Supplies 400
Finished goods ₽ 9,000 Equipment 5,700
Work-in-process __3,000 __12,000 Accounts payable _3,700 11,300
Total ₽363,875 Total ₽363,875

The basic weakness of this approach is that the components of the “net gain” or “net loss are not disclosed.

To illustrate further the conventional or traditional statement of realization and liquidation, assume the following data
for Folded and Hung Company. The balance sheet on October 1, 2021 is as follows:

Assets Liabilities and Stockholders’ Equity

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ₽ 30,000 Accounts payable . . . . . . . . . . . . . . ₽ 160,000
Marketable securities . . . . . . . . . . . . . . . 90,000 Mortgage payable . . . . . . . . . . . . . 140,000
Accounts receivable . . . . . . . . . . . . . . . . 120,000 Unearned revenue . . . . . . . . . . . . . . 25,000
Merchandise inventory . . . . . . . . . . . . . . 110,000 Common stock, P10 par . . . . . . . . . 211,000
Equipments (net) . . . . . . . . . . . . . . . . . . . __36,000 Deficit . . . . . . . . . . . . . . . . . . . . . . . . . ( 150,000)
₽ 386,000 ₽386,000

During October:
Noncash transactions:
a) Purchases of merchandise on account, ₽11,000.
b) Sales of merchandise on account, ₽44,000.
Cash receipts:
c) Cash sales, ₽36,000.
d) Collections on accounts receivable, ₽80,000.
e) Interest collected on marketable securities, ₽4,600.
f) Sale of marketable securities for cash, ₽98,000.
Cash disbursements:
g) Payment of liquidation expenses, ₽13,000.
h) Payment of accounts payable, ₽70,000.
i) Cash purchases, ₽24,000.

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As of October 31, 2021, it is estimated that ₽7,000 of the accounts receivable will not be collected. Salaries and
wages of ₽4,300 remains unpaid. Interest of ₽1,800 has accrued on the mortgage payable. Cost of goods sold in
October amounted to ₽86,000. Depreciation of equipment for October is ₽500. Of the unearned revenue, ₽1,000 is to
be transferred to rental income for the month. The following statement of realization and liquidation under the
conventional format is as follows:

Folded and Hung Company

Statement of Realization and Liquidation
For the Months ended, October 31, 2021
Assets to be Realized: Assets Realized:
Marketable securities ₽ 90,000 Accounts receivable ₽ 80,000
Accounts receivable 120,000 Marketable securities _98,000 ₽178,000
Merchandise inventory 110,000 Assets Not Realized:
Equipments (net) __36,000 ₽356,000 Accounts receivable (1) P 77,000
Assets acquired : Merchandise inventory (2) 59,000
Accounts receivable 44,000 Equipments (3) __35,500 171,500
Liabilities Liquidated: Liabilities to be Liquidated:
Accounts payable 70,000 Accounts payable P160,000
Liabilities Not Liquidated: Mortgage payable 140,000
Accounts Payable (4) P101,000 Unearned revenue __25,000 325,000
Accrued expenses (5) 4,300 Liabilities Assumed:
Mortgage payable (6) 140,000 Accounts payable 11,000
Unearned revenue (7) __24,000 269,300
Supplementary Debits: Supplementary Credits:
Purchases – account P 11,000 Sales – account P 44,000
Liquidation expenses 13,000 Sales – cash 36,000
Purchases – cash __24,000 __48,000 Interest on marketable ___4,600 __84,600
P770,100
Net loss __17,200
Total P787,300 Total P787,300

The assets not realized and liabilities not liquidated are computed as follows:
1) Accounts receivable:
October 1, 20x4 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 120,000
Add: Sales on account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___44,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 164,000
Less: Collections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____7,000
October 31, 20x4 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 77,000

2) Merchandise inventory
October 1, 20x4 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P110,000
Add: Purchases on account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000
Purchases – cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __24,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P145,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __86,000
October 31, 20x4 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 59,000

3) Equipments, net
October 1, 20x4 balance (P60,000 – P24,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 36,000
Less: Depreciation charge for October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _____500
October 31, 20x4 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 35,500

4) Accounts payable
October 1, 20x4 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 160,000
Add: Purchases on account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __11,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P171,000
Less: Payments of accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __70,000
October 31, 20x4 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P101,000
5) Accrued expenses (salaries and wages), P4,300.
6) Mortgage payable, P140,000.
7) Unearned revenue
October 1, 20x4 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 25,000
Less: Earned for the month of October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____1,000
October 31, 20x4 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,000

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Another Illustration: Statement of realization & liquidation

Book
Book values
values
Accrued expenses 221,000
Cash 40,000
Current tax payable 350,000
Accounts receivable 220,000
Accounts payable 1,000,000
Note receivable 100,000
Interest receivable - Note payable 300,000
Inventory 530,000 Loan payable 2,000,000
Prepaid assets 10,000 Interest payable -
Land and building 2,500,000 Est. admin expenses -
Equipment, net 300,000 3,871,000
Total assets 3,700,000

Capital deficiency (171,000)

Total liabilities & equity 3,700,000

Additional information:
a. An accrued interest receivable of ₽10,000 was not yet recorded.
b. Administrative expenses expected to be incurred during the liquidation process is
₽30,000. This amount is not yet reflected on the statement of financial position.
c. Accrued interest on the loan payable amounting to ₽15,000 was not reflected in the
statement of financial position.
Jan. 1, 20x1 Cash 40,000
Accounts receivable 220,000
Note receivable 100,000
Inventory 530,000
Prepaid assets 10,000
Land 500,000
Building 2,000,000
Equipment 300,000
Estate deficit (squeeze) 171,000
Accrued expenses 221,000
Current tax payable 350,000
Accounts payable 1,000,000
Note payable 300,000
Loan payable 2,000,000

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The entries to record the “new” assets and liabilities are as follows:

Amount
Date Particulars
Debit Credit
Jan. 1, 20x1 Interest receivable - new 10,000
Estate deficit 10,000
Jan. 1, 20x1 Estate deficit 15,000
Interest payable - new 15,000

Transactions that have transcribed during the period:

a. Of the total accounts receivable, only ₱165K have been collected. The
remaining balance was written-off.
b. Only 90% of the note receivable was collected. The remaining balance was
written-off. All of the accrued interest was collected.
c. Half of the inventory was sold for ₱300K. Actual costs to sell were ₱5K.
d. The balance of the prepaid assets account was written-off.
e. The land and building were sold for ₱2.6M as expected.
f. The equipment was sold for ₱220K.
g. Of the total accrued expenses, only the accrued salaries of ₱25K were paid.
h. The current tax payable was paid in full.
i. The loan payable and interest payable were paid in full.
j. ₱220K were paid for the note payable. The lender waived payment for the
balance.
k. Actual administrative expenses paid amounted to ₱27K.

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Journal entries:

a Cash 165,000 f Cash 220,000

Estate deficit 55,000 Estate deficit 80,000
Accounts receivable 220,000 Equipment 300,000

b Cash [(100K x 90%) + 10K] 100,000 g Accrued expenses 25,000

Estate deficit 10,000 Cash 25,000
Note receivable 100,000
Interest receivable 10,000 h Current tax payable 350,000
Cash 350,000
c Cash (300K - 5K) 295,000
Inventory (530K x 50%) 265,000 i Interest payable 15,000
Estate deficit 30,000 Loan payable 2,000,000
Cash 2,015,000
d Estate deficit 10,000
Prepaid assets 10,000 j Note payable 300,000
Cash 220,000
e Cash 2,600,000 Estate deficit 80,000
Land 500,000
Building 2,000,000 k Estate deficit 27,000
Estate deficit 100,000 Cash 27,000

The amounts to be presented in the Statement of Realization and

Liquidation are identified as follows:

 Assets to be realized is ₽3,660,000, (₽3,710,000 total assets less ₽40,000 cash.

 Assets acquired is ₽10K.
 Assets realized (actual net proceeds) ₽3,380,000.
 Assets not realized (book value) of inventory, ₽265,000 (₽530,000 x 50%).
 Liabilities to be liquidated is ₽3,871,000.
 Liabilities assumed is ₽15K (interest payable).
 Liabilities liquidated (actual settlement amounts) ₽2,610,000.
 Liabilities to be liquidated ₽1,196,000.
 Supplementary expense ₽27,000.
 No supplementary income during the period.

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T-account, the net gain (loss) during the period:

Debits Credits
Assets to be realized, excluding cash 3,660,000 3,380,000 Assets realized
Assets acquired 10,000 265,000 Assets not realized

Liabilities liquidated 2,610,000 3,871,000 Liabilities to be liquidated

Liabilities not liquidated 1,196,000 15,000 Liabilities assumed

Supplementary expenses 27,000 - Supplementary income

Totals 7,503,000 7,531,000 Totals
Net gain - excess credits over debits 28,000

ABC Co. in receivership

Statement of Realization and Liquidation
For the six months ended June 30, 20x1
ASSETS
Assets to be realized: Assets realized:
Accounts receivable 220,000 Accounts receivable 165,000
Note receivable 100,000 Note receivable 90,000
Inventory 530,000 Inventory 10,000
Prepaid assets 10,000 Prepaid assets 295,000
Land and building 2,500,000 Land and building 2,600,000
Equipment, net 300,000 Equipment, net 220,000
Total 3,660,000 Total 3,380,000

Assets acquired: Assets not realized:

Interest receivable 10,000 Inventory 265,000

LIABILITIES
Liabilities liquidated: Liabilities to be liquidated:
Accrued expenses 25,000 Accrued expenses 221,000
Current tax payable 350,000 Current tax payable 350,000
Interest payable 15,000 Accounts payable 1,000,000
Loan payable 2,000,000 Loan payable 2,000,000
Note payable 220,000 Note payable 300,000
Total 2,610,000 Total 3,871,000

Liabilities not liquidated: Liabilities assumed:

Accrued expenses 196,000 Interest payable 15,000
Accounts payable 1,000,000
1,196,000

SUPPLEMENTARY ITEMS
Supplementary expenses: Supplementary income:
Administrative Expenses 27,000 -
Net gain during the period 28,000
7,531,000 7,531,000

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END OF CHAPTER 5

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