CORPORATIONS IN FINANCIAL DIFFICULLTY; LIQUIDATIONS

Multiple Choices—Computational
1. The Metro Bank loaned 40,000 to Ilocano Company. The loan is secured by inventory with a book and fair
value of P50, 000 and P30, 000, respectively. What amount will the bank receive if unsecured creditors
receive 25% of their claims?
a. P10,000
b. P30,000
c. P32,500
d. P40,000

Solution:
Amount realized secured by inventory P 30,000
Unsecured claim (P10,000 x 25%) 2,500
Total amount received P 32,500

2. The Abra Company owes P200, 000 on a note payable plus P8,000 in interest to its bank. The note is
secured by inventory with a book value of P160, 000 and a fair value of P120,000. What amount will the
bank received if unsecured creditors received 75% of their claims?
a. P120,000
b. P160,000
c. P180,000
d. P186,000

Solution:
Amount realized secured by inventory P120,000
Unsecured claim (P88,000 x 75%) 66,000
Total amount received P186,000

3. The real Company owes P15,000,000 on the mortgage of its building to City Bank. The building has a net
book value of P20,000,000 and a fair value of P18,000,000. When Red company file or liquidation, it owed
interest of p90, 000; when the building is sold for P18, 000,000, the interest due on the mortgage is P200,
000. What amount will the bank if the receive if the unsecured creditors received 80% of their claims?
a. P15,000,000
b. P15,160,000
c. P15,178,000
d. P15,200,000
Solution:
(P15,000,000 + P200,000) P15,200,000

Use the following data for items 4-5

When the Pasig Company filed for liquidation with Securities and Exchange Commission, it prepared the
following balance sheet:
Current assets (net realizable value, P50,000) P 80,000
Land and building (fair value, P240,000) 200,000
Goodwill (fair value, 0) 40,000
Total assets 320,000
Accounts payable P 160,000
Mortgage payable (secured by land and building) 200,000
Common stock 100,000
 Retained earnings (deficit) (140,000)
Total P 320,000

4. What is the estimate deficiency to unsecured creditors?

a. P 70,000
b. P 90,000
c. P 120,000
d. P 140,000
Solution:
Realizable value: Current assets P 50,000
Land and building P240,000
Less mortgage payable 200,000 40,000
Total 90,000
Less accounts payable 160,000
Estimated deficiency to unsecured creditors P 70,000

5. What percentage of their claims are the unsecured creditors likely to get?
a. 43.75%
b. 50%
c. 56.25%
d. 100%
Solution:
Total realizable value to unsecured creditors (P90,000)/total unsecured
Claims (P160,000) = 56.25%

6. A company is to be liquidated and has the following liabilities:

Income taxes P 8,000
Notes payable (secured by land) 120,000
Accounts payable 83,000
Salary payable (evenly to two employees 6,000
Bonds payable 70,000
Administrative expense for liquidation 20,000

The company has the following assets:

Book Value Fair Value
Current assets P 80,000 P 33,000
Land 100,000 90,000
Building 100,000 110,000

How much will the holders of notes payable collect following the liquidation?
a. P 108,000
b. P 83,000
c. P 90,000
d. P 120,000

Solution:
 Free assets:
Current assets P 33,000
Buildings and equipment 110,000
Total P143,000
Liabilities with priority:
Administrative expenses P 20,000
Salary payable 6,000
Income taxes 8,000
Total P 34,000
Free assets after payment of liabilities with priority:
(P143,000 – P34,000) P109,000
Unsecured liabilities
Notes payable P 30,000
Accounts payable 83,000
Bonds payable 70,000
Total P183,000
Percentage of Unsecured liabilities to be paid: P109,000 / P183,000 = 60%
Payment of notes payable:
Value of security (land) P 90,000
60% of remaining P30,000 18,000
Total collected P108,000

7. Cebuano Company has had severe financial difficulties and is considering the possibility of liquidation. At
this time, the company has the following assets (stated at net realizable value) and liabilities.
Assets (pledge against debts of P 70,000) P 116,000
Assets (pledge against debts od P 130,000 50,000
Other assets 80,000
Liabilities with priority 42,000
Unsecured creditors 200,000
In liquidation, how much would be paid to the partially secured creditors?
a. P 130,000
b. P 50,000
c. P 74,000
d. P 200,000
Solution:
Free assets:
Other assets P 80,000
Excess from assets pledged with secured
Creditors (P116,000 – P70,000) 46,000
Total P126,000
Liabilities with priority P 42,000
Free assets after payment of liabilities with priority
(P126,000 – P42,000) P 84,000
Unsecured liabilities:
Excess of partially secured liabilities over pledge
Assets (P130,000 – P50,000) P 80,000
Unsecured creditors 200,000
Total P280,000
Recovery percentage: P84,000 / P280,000 = 30%
 Payment of partially secured debt:
Value of pledged assets P 50,000
30% of remaining P80,000 24,000
Total collected P 74,000

8. The moon Company has the following:

Unsecured creditors P 230,000
Liabilities with priority 110,000
Secured liabilities:
Debt one, P 210,000; value of pledge asset 180,000
Debt two, P 170, 000; value pledge asset 100,000
Debt three, P 120,000; value of pledge asset 140,000
The company also has a number of other assets that are not pledge in anyway.
The creditors holding debt two want to receive at least P 142,000. For how much do these free assets have to be sold
so that debt two would receive exactly P 142,000?
a. P 308,000
b. P 198,000
c. P 340,000
d. P 330,000
Solution:
The holder of Debt Two will receive P100,000 from the sale of the pledged asset. Since the holder wants to
receive P142,000 out of the total debt of P170,000, the company must be able to generate enough cash to
pay off 60% of the unsecured liabilities (P42,000/P70,000) after paying 100% of the liabilities with priority
(P110,000).
Unsecured liabilities:
Unsecured creditors P230,000
Excess liability of Debt One in excess of pledged
Asset (P210,000 – P180,000) 30,000
Excess liability of Debt Two in excess of pledged
Asset (P170,000 – P100,000) 70,000
Total unsecured liabilities P330,000
Necessary percentage 60%
Cash needed for these liabilities P198,000

In order for the holder of Debt Two to received exactly P142,000, the other free assets must be sold for
P308,000. With that much money, the liabilities with priority (P110,000) can be paid with the remaining
P198,000 going to the unsecured debts of P330,000. This 60% figure would insure that the holder of Debt
Two would get P100,000 from the pledged asset and P42,000 (P70,000 x 60%) from the free assets
.
Use the following information for items 9 and 10
The following are the data provided by trinity Company:
Assets at book value P 100,000
Assets at net realizable value 75,000
Liabilities at book value
Fully secured mortgage 40,000
Unsecured accounts and notes payable 45,000
Unrecorded liabilities:
Interest on bank notes 250
Estimated administrative expense 4,000
A trustee is appointed to liquidate the company.
 9. The journal entry made by the trustee to record the assets and liabilities should include an estate equity
(deficit) of:
a. P 14,250
b. P 14,000
c. P10,250
d. P 10,000
Solution:
Estate equity, beg. (P100,000 – P85,000) P 15,000
Loss on realization (P100,000 – P75,000) ( 25,000)

Unrecorded liabilities:
Interest expense P 250
Administrative expense 4,000 ( 4,250)
Estate deficit P( 14,250)

10. The estimate of affairs prepared by the trustee at this time should include an estimate deficiency to
unsecured creditors of:
a. P 35,000
b. P31, 000
c. P 14,250
d. P 10,000
Solution:
Total assets at net realizable value P 75,000
Fully secured liabilities (40,000)
Estimated administrative expense ( 4,000)
Estimated amount available P 31,000
Unsecured claims (P45,000 + P250) (45,250)
Estimated deficiency to unsecured creditors P 14,250

11. DWC Company filed a voluntary bankruptcy petition on August 15,2011, and the statement of affairs
reflects the following amounts:
Book Carrying Value Estimated Current
Value
Assets:
Assets pledge with fully secured creditors P150,000 P185,000
Assets pledge with partially secured creditors 90,000 60,000
Free assets 210,000 180,000
P450,000 P405,000
Liabilities:
Liabilities with priority P35,000
Fully secured creditors 130,000
Partially secured creditors 100,000
Unsecured creditors 270,000
P535,000

Assume that the assets are converted into cash at the estimated current value and the business is liquidated.
How much cash will be available to pay the unsecured non priority claims?
a. P 240,000
b. P 180,000
 c. P 160,000
d. P 125,000
Solution:
Assets pledged with fully secured creditors P185,000
Fully secured creditors 130,000 55,000
Free assets 160,000
Total free assets 215,000
Less: Liabilities with priority 35,000
Available to unsecured non-priority claims P180,000

12. Filipino Co. has been forced into bankruptcy and liquidated. Unsecured claims will be paid at the rate of
P0.50 on the peso. Gold Co. holds a non-interest bearing note receivable from Filipino Co. in the amount of
P50,000, collateralized by machinery with a liquidation value of P10,000. The total amount to be realized
by Gold on this note receivable is-
a. P 35,000
b. P 30,000
c. P 25,000
d. P 10,000
Solution:
Machinery P 10,000
Recoveries of unsecured claims (50,000 - 10,000) X .50 20,000
Amount to be realized P 30,000

13. The statement of affairs for Narra Corporation shows that approximately P0.78 on the peso probably will
be paid to unsecured creditors without priority. The acorporation owes Wood Company P 23,000 on a
promissory note, plus accrued interest of P940. Inventories with a current fair value of P19,200
collateralize the note payable.
Compute the amount that Wood should receive from Narra assuming that the actual payments to unsecured
creditors without priority consist of 78% of total claims. Round all amounts to the nearest peso.
a. P 19,200
b. P 22,897
c. P 33,897
d. P 52,200
Solution:
Notes Payable P 23,940
Less: Inventories 19,200
Unsecured Liabilities 4,740
% of recovery 78%
Recovery 3,697
Add: Inventories 19,200
Amount to be received by Wood P 22,897

14-17 are based on the following date taken from the statement of affairs of MM Corporation:
Assets pledge for fully secured liabilities
(current fair value, P75,000) P 90,000
Assets pledge of partially secured liabilities
(current fair value, P52,000 74,000
Free assets (current fair value, P40,000 70,000
Unsecured liabilities with priority 7,000
 Fully secured liabilities 30,000
Partially secured liabilities 60,000
Unsecured liabilities without priority 112,000
14. The amount that will be paid to creditors with priority is-
a. P 7,000
b. P 6,000
c. P 7,500
d. P 6,200
15. The amount to be paid to fully secured creditors is
a. P30,000
b. P32,000
c. P20,000
d. P 35,000
16. The amount to be paid to partially secured creditors is
a. P 52,700
b. P 57,200
c. P 56,200
d. P 57,000
17. The amount to be paid to unsecured creditors is
a. P 78,200
b. P 70,800
c. P 72,000
d. P 72,800
Solution:
14: P7,000
15: P30,000
16: P57,200 [52,000 + (8,000 X .65)]
17: P72,800 (112,000 X .65)

18. The following information is available concerning Mayon Inc. on the date the company entered bankruptcy
proceedings:
Account Balance Per Books
Cash P 2,860
Accounts receivable 52,260
Inventory 28,000
Prepaid expenses 430
Buildings, Net 59,000
Equipment, Net 5,600
Goodwill 5,650
Wages payable (2,500)
Taxes payable (1,810)
Accounts payable (79,000)
Notes payable (15,150)
Common stock (72,000)
Retained earnings, Deficit 16,600
Inventory with a book value of P 20,000 is a security for notes of P10, 100. The other notes are secured by
the equipment.

Expected realizable values of the assets are:

Accounts receivable P 44,100
 Inventory 18,500
Buildings 22,000
equipment 2,000
What is the estimated deficiency to unsecured creditors?
a. P 79,000
b. P 65,500
c. P 72,500
d. P 9,000
Solution:
Estimated loss:
Account Receivable P 8,160
Inventories (28,000 - 18,500) 9,500
Building (59,000 - 22,000) 3 7,000
Equipment (5,600 - 2,000) 3,600
Goodwill 5,650
Prepaid expenses 430 P 64,340
Less: Stockholder's equity
Common stock P 72,000
Deficit ( 16,660) 55,340
Estimated deficiency P 9,000

Items 19-22 are based on the following data:

Because of inability to pay its debts, Taal Manufacturing Company has been forced into bankruptcy as of
April 30, 2017. The statement of Financial Position on that date shows:
assets Liabilities
Cash P 2,700 Accounts Payable P 52,500
Accounts Receivable 39,350 Notes Payable-PNB 15,000
Notes Receivable 18,500 Notes Payable-Suppliers 51,250
Inventories 87,850 Accrued Wages 1,850
Prepaid expenses 950 Accrued Taxes 4,650
Land and buildings 61,250 Mortgage Bond Payable 90,000
Equipment 48,800 Common Stock-P100par 75,000
Retained Earnings (30,850)
P 259,400 P 259,400
Additional Information:
a. Accounts receivable of P 16,110 and notes receivable of P112, 250 are expected to be collectible. The good
notes are pledge to Phil. National Bank.
b. Inventories are expected to bring in P 45,100 when sold under bankruptcy conditions.
c. Land and buildings have an appraised value of P95,000. They serve as security on the bonds.
d. The current value of the equipment, net of disposal cost P9,000.
19. The estimated loss on asset disposition is
a. P 82,550
b. P 29, 240
c. P 111,790
d. P 112,740
Solution:
Accounts Receivable (39,350 - 16, 110) P 23,240
Notes Receivable (18,500 - 12,500) 600
Inventories (87,850 - 45,100) 42,750
Prepaid expenses 950
 Equipment (48,800 - 9,000) 39,800
Total estimated loss P112,740

20. What is the estimated gain in asset disposition?

a. P 45,100
b. P 33,750
c. P 0
d. P 34,700
Solution:
P33,750 (95,000 - 61,250) on Land and Building

21. The expected recovery percentage rounded is

a. 47%
b. 50%
c. 48%
d. 67%
Solution:
Total Free Assets:
Balance of Assets Pledged to
Fully Secured Creditor (95,000 - 90,000) P 5,000
Free Assets:
Cash P 2,700
Accounts Receivable 16,110
Inventories 45,100
Equipment 9,000 72,910
Total 77,910
Less: Unsecured liabilities with priority (1,850 + 4,650) 6,500
Net Free Assets P 71,410
Divide by Unsecured creditors:
Balance of Partially Secured Creditor
Notes Payable - PNB P 15,000
Notes Receivable 12,500 2,500
Accounts Payable 52,500
Notes Payable 51,250 103,750 ÷ P106,250
Estimated recovery % 67%
22. What is the estimated payment to creditors?
a. P 102,500
b. P 215,250
c. P 118,750
d. P 180,188
Solution:
Fully secured (Notes Payable) P 90,000
Partially secured:
Notes Payable - PNB P12,500
Add (2,500 X 67%) 1,675 14,175
Unsecured Creditor with Priority 6,500
Unsecured Creditor without Priority (103,750 X 67%) 69,513
Total P180,188
23. The following data were taken from statement affairs of CAP Company:
 Unsecured liabilities with priority P 122,500
Stockholders ‘equity 441,000
Estimated liquidation expenses 22,125
Unsecured liabilities without priority 1,102,500
Loss on realization of assets 551,250
How much is the total free assets?
a. P 1,059,625
b. P 937,125
c. P 992,250
d. P 953, 575
Solution:
Unsecured creditors without priority P1,102,500
Estimated deficiency to unsecured creditors:
Loss on realization 551,250
Estimated liquidation expenses 55,125
Total 606,375
Stockholders’ equity 441,000 165,375
Net free assets 937,125
Liabilities with priority 122,500
Free assets P 1,059,625

24. The following data were taken from the records of Bad Company who is in the process of liquidation:
Stockholders’ equity, per books:
Capital stock P350,000
Deficit 54,250
Estimated gain on realization of land and building 78,750
Estimated loss on realization of assets:
Accounts receivable 23,100
Inventories 84,000
Prepaid expenses 2,100
Equipment 170,000
Goodwill 57,500
Estimated claims requiring settlement:
Liquidation expenses 17,500
Contingent liabilities 26,250
What is the estimated deficiency to unsecured creditors?
a. P 5,950
b. P 75,950
c. P 81,550
d. P 7,350
Solution:
Estimated net gain (loss) on realization:
Gain on realization 78,750
Loss on realization (336,700) (257,950)
Estimated claims ( 43,750)
Total (301,700)
Stockholders’ equity 295,750
Estimated deficiency P( 5,950)
 25. A review of the assets and liabilities of the No Good Company, in bankruptcy on ‘June 31, 2017, discloses
the following:
 A mortgage payable of P350,000 is secured by land and buildings valued at P560,000.
 Notes payable of P175,000 are secured by equipment valued at P140,000.
 Assets other than those referred to, have an estimated value of P157,500.
 Liabilities other than those referred to, total P450,000, which included claims with priority of
P52,500.
What is the estimated deficiency to unsecured creditors?
a. P 87,500
b. P 35,000
c. P402,500
d. P315,000
Solution:
Notes payable (175,000 – 140,000) P 35,000
Unsecured liabilities (420,000 – 52,500) 367,500
Total 402,500
Net free assets (157,500 + 210,000) – P52,500 315,000
Estimated deficiency 87,500

26. A trustee has been appointed by SEC for ABU Inc., which is being liquidated. The following transactions
occurred after the assets were transferred to the trustee:
a. Sales on account by the trustee were P75,000. Cost of goods sold were P60,000, consisting of all the
inventory transferred from ABU.
b. The trustee sold at P12,000 worth of marketable securities for P10,500.
c. Receivables collected by the trustee:
-----------------------------------------------------------------------
Old: P21,000 of the P38,000 transferred
New: P47,000
-----------------------------------------------------------------------
d. Recorded P16,000 depreciation on the plant assets of P96,000 transferred from ABU.
e. Disbursements by the trustee:
--------------------------------------------------------------------------
Old current payables: P22,000 of the 48,000 transferred
Trustee’s expenses: P4,300
--------------------------------------------------------------------------
In the statement of realization and liquidation of ABU Inc.
How much are the total assets to be realized?
a. P206,000
b. P168,000
c. P140,000
d. P218,000
Solution:
Old receivable (net) P 38,000
Marketable securities 12,000
Old inventory 60,000
Depreciable assets- net 96,000
Total assets to be realized P206,000
27. Using the data in item 26, how much is the total assets realized?
a. P153,500
 b. P132,500
c. P150,500
d. P143,000
Solution:
Old receivable P 21,000
New receivable 47,000
Marketable securities 10,500
Sales of inventory 75,000
Total asset realized P153,500

28. Using the data in item 26, how much is the net gain (loss)?
a. P(6,800)
b. P8,600
c. P11,100
d. P2,500
Solution:
Gain on sale of inventory (P75,000 – 60,000) 15,000
Loss on realization:
Marketable securities (12,000 – 10,500) 1,500
Trustee’s expenses 4,300
Depreciation 16,000 (21,800)
Net loss P( 6,800)

29. Legacy Corporation filed a bankruptcy petition on January, 2017. On March 1,2017 the trustee provided the
following information about the corporation’s financial affairs:

Assets Book Value Realizable Value

Cash P40,000 P40,000
Accounts receivable-net 200,000 150,000
Inventories 300,000 140,000
Property and equipment 500,000 560,000
Total assets P1,040,000

Liabilities
Liabilities with priority claims P160,000
Unsevered accounts payable 300,000
Notes payable (secured by accounts
Receivable) 200,000
Mortgage payable (secured by all
Property and equipment) 400,000
Total liabilities P1,100,000

1. What is the amount expected to be available for unsecured claims without priority?
a. P300,000
b. P580,000
c. P140,000
d. P310,000
2. What is the expected recovery percentage for unsecured creditors?
a. 40%
 b. 21.5%
c. 22.3%
d. 41.5%
3. What is the total estimated payment to creditors
a. P890,000
b. P730,000
c. P45,000
d. P750,000
Solution:
Correction of the problem: The book value of the Mortgage Payable should be P440,000.
1. Net free assets:
Cash P 40,000
Inventory 140,000
Property and equipment (P560,000 – P440,000) 120,000
Total free assets P300,000
Less liabilities with priority 160,000
Amount available for unsecured claims without priority P140,000
2. Net free assets / Unsecured creditors without priority
P140,000 / (P50,000 + P300,000) = 40%
3. Unsecured liabilities with priority P160,000
Fully secured liabilities (Mortgage payable) 440,000
Partially secured liabilities (Note payable):
Secured by accounts receivable P150,000
Unsecured (P50,000 x 40%) 20,000 170,000
Unsecured liabilities without priority 120,000
Total estimated payment to creditors P890,000

30. The following data were taken from the statement of realization and liquidating of DLR Corporation for the
quarter ended September 30,2017:
Assets to be realized P 330,000
Assets acquired 360,000
Assets realized 420,000
Assets not realized 150,000
Liabilities to be liquidated 540,000
Liabilities assumed 180,000
Liabilities liquidated 360,000
Liabilities not liquidated 450,000
Supplementary credits 510,000
Supplementary charges 468,000
The ending balances of capitall stock and retained earnings are P300,000 and P120,000, respectively.
1. What is the net income (loss) for the period?
a. P(168,000)
b. P168,000
c. P(210,000)
d. P210,000
2. What is the ending balance of cash?
a. P720,000
b. P560,000
c. P700,000
 d. P460,000
Solution:
1. Debits:
Assets to be realized P 330,000
Assets acquired 360,000
Liabilities liquidated 360,000
Liabilities not liquidated 450,000
Supplementary charges 468,000
Total P1,968,000
Credits:
Assets realized P 420,000
Assets not realized 150,000
Liabilities to be liquidated 540,000
Liabilities assumed 180,000
Supplementary credits P1,800,000
Net loss P 168,000

2. Capital stock P300,000

Retained earnings 120,000
Liabilities not liquidated 450,000
Total assets P870,000
Less assets not realized 150,000
Cash balance P720,000

31. RB Manufacturing, Inc. is considering seeking relief under the Insolvency Law. However, the company
would prefer to engage in out-of-court activities that would allow for a restructuring of debts in an orderly
manner. Before approaching its creditors, the company is attempting to estimate the amount of
consideration that would be received by various classes of creditors if the company did liquidate. The
company's assets and liabilities are as follows:

Assets Book Value Realizable Value

Cash P60,000 P60,000
Receivables 420,000 360,000
Inventory 400,000 350,000
Equipment 380,000 360,000
Land 200,000 260,000
Other assets 60,000 45,000
Total P1,520,000 P1,435,000
Liabilities
Accounts payable P280,000
Notes payable - A 600,000
Notes payable- B 500,000
Mortgage payable 180,000
Accrued interest 12,000
Other liabilities 24,000
Total P1,596,000

Of the accounts payable, P130,000 is secured by inventory which has a net realizable value of P150,000. Note A is
secured by the balance of inventory and receivables. Note B is secured by equipment with a net realizable value of
P300,000, and the mortgage payable and accrued interest are secured by the land. All of the other liabilities are
unsecured, although P10,000 is unsecured with priority over the balance.

1. How much is to be paid to fully secured creditors?

a. P322,000
b. P310,000
c. P130,000
d. P232,000

2. How much is to be paid to partially secured creditors?

a. P860,000
b. P560,000
c. P300,000
d. P660,000

3. How much is to be paid to unsecured creditors with priority?

a. P10,000
b. P 0
c. P14,000
d. 24,000

4. How much is to be paid unsecured creditors without priority?

a. P243,000
b. P223,000
c. P183,000
d. P193,000

5. How much is the total consideration to be received in satisfaction of note payable - B?

a. P300,000
b. P120,300
c. P420,000
d. P420,300

1. A
2. A
3. A
4. D

Supporting computations:
Liabilities Fully Partially Unsecured Unsecured Total
Secured Secured w/priority w/o priority
Accounts
payable P130,00 150,000 280,000
Note
Payable - A P560,000 40,000 600,000
Note
Payable – 300,000 200,000 500,000
B
Mortgage 180,000 180,000
payable
Accrued 12,000 12,000
Interest
Other 10,000 14,000 24,000
liabilities
P322,000 P860,000 P10,000 P202,000 P1,596,000
Total

Assets to be Realizable
applied: Value

Inventory P20,000
P150,000
P150,000 130,000
Inventory
P200,000 200,000
200,000
Receivables
360,000 360,000
360,000
Equipment 300,000
300,000
300,000
Equipment
60,000
60,000 60,000
Land
192,000 68,000
260,000 260,000
Cash
P10,000
60,000 50,000 60,000
Other assets
45,000 45,000 45,000
TOTAL
322,000 860,000 P10,000
P1,435,000 P1,435,000
P243,000