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CHAPTER 4 - CORPORATE LIQUIDATION
1. Assets pledged to partially secured creditors because the estimated realizable value of the
land and buildings is only 70,000 is less than the mortgage payable and interest of 102,500
2. Statement of Affairs
Amount Loss(Gain
Value Avail. To ) on
Book Estimated. Unsecured realization
Value Realizable Creditors
Assets pledged to Fully Secured
Creditors
105,000 Accounts Receivable 80,000 25,000
Notes Payable (50,000) 30,000
Assets Pledged to Partially Secured

Creditors
25,000 Land 45,000 (20,000)
100,000 Buildings 25,000 75,000
Total 70,000
Mortgage Payable 100,000
Interest 2,500 102,500
( 32,500)
Free Assets
40,000 Cash 40,000 40,000 -
100,000 Inventories 105,000 105,000 ( 5,000)
75,000 Equipment – net 30,000 30,000 45,000
5,000 Intangible Assets 0 0 5,000
______ 125,000
Amt. avail to unsecured creditors 205,000
Unsecured creditors with priority ( 80,400)
Amt. available to unsecured
Creditors without priority 124,600
Estimated deficiency 107,900
_______ Total 232,500
450,000 Unsecured
Unsecured creditors with priority
12,000 Wages payable 12,000
38,000 Taxes payable 38,000
Payable to trustee 30,400
80,400
Fully Secured Creditors
50,000 Notes Payable 50,000
Partially Secured Creditors

100,000 Mortgage Payable 100,000
2,500 Interest 2,500 102,500
Land and Buildings 70,000 32,500
Unsecured creditors w/o priority

200,000 Accounts payable 200,000
Stockholders’ Equity
150,000 Capital stock
(102,500) Retained Earnings (Deficit)
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450,000 Total 232,500
3. Deficiency Statement
Estimated losses on realization:
Accounts Receivable 25,000
Equipment 45,000
Buildings 75,000
Intangible Assets 5,000 150,000
Additional liabilities
Total estimated losses 180,400
Estimated gains on realization

Inventories 5,000
Land 20,000 (25,000)
Estimated net loss on realization 155,400
Loss absorbed by stockholders
Capital stock 150,000
Retained earnings (deficit) (102,500) ( 47,500)
Estimated deficiency to unsecured creditors 107,900
4. Expected recovery rate = Amount available to unsecured creditors without priority

Total unsecured creditors without priority
= 124,600
232,500
= 53.59% or 54%
5. Estimated amount payable to each class of creditor

Unsecured creditors with priority 80,400 x 100% = 80,400
Fully secured creditors - NP 50,000 x 100% = 50,000
Partially secured creditors
Mortgage payable and interest 102,500
Land and buildings ( 70,000) x 100% = 70,000
32,500 x 54% = 17,550 87,550
Unsecured without priority - AP 200,000 x 54% = 108,000

6. If the amount realized on the actual sales of the assets will be the same as the estimated
realizable value, then the creditors will receive the amount we have computed per
requirement No. 5. The actual amount to be received will depend on the actual amount
realized from the sale.
Problem 2 – Fallen Corporation
1. Cash 20,000
Inventories 80,000
Plant assets (290,000 – 200,000) 90,000
Total amount 190,000
Liabilities for priority claims (70,000)
Amount to be available for unsecured claims w/o priority 120,000
2. Notes payable ( 100,000 – 75,000) 25,000

Accounts payable 150,000
Total unsecured without priority 175,000
Amount available for unsecured claims without priority (120,000)
Amount of liabilities that may not be paid 55,000
3. If we have an estimated deficiency to unsecured creditors, it means no amount will be

paid to stockholders.
4. Estimated recovery rate = 120,000 = 68,57
175,000
5. Amount that may be recovered by each creditor
Liabilities for priority claims 70,000 x 100% = 70,000
Mortgage payable 200,000 x 100% = 200,000
Notes payable 100,000
Collateral – AR (75,000 x 100% = 75,000
Unsecured 25,000 x 69% = 17,250 = 92,250
Accounts payable 150,000 x 69% = 103,500
Problem 3 –Losing Company
1. Partially secured liabilities (125,000 – 110,000) 15,000
Unsecured liabilities without priority 145,000 160,000
Assets pledged for fully secured liabilities (250,000-210,000) 40,000

Free Assets 149,000
Total amount of cash to be available 189,000
Unsecured with priority ( 55,500) 133,500
2. No amount is payable to the stockholder. If there is a deficiency to unsecured creditors

without priority, definitely the stockholders will not receive any amount. If the
stockholders will receive an amount, then there will be no deficiency to unsecured
creditors. The total stockholders’ equity is more than the estimated loss on realization,
so the unsecured creditors without priority will not absorb any part of the net loss on
realization
3. Settlement per peso of unsecured creditors or estimated recovery rate =

133,500/160,000=0.84
Problem 3 - Damaged Corporation
1. Shortcut to compute estimated deficiency
Cash to be available
Cash 80,000
Accounts receivable 160,000
Merchandise inventory 210,000
Equipment 60,000
Land and buildings 140,000
Total cash 650,000
Liabilities payable
Wages payable 24,000
Taxes payable 76,000
Mortgage payable and interest 205,000
Payable to trustee 11,000 816,000
Estimated deficiency to unsecured creditors (166,000)
2. Deficiency statement – this will prove the correctness of the estimated deficiency to
unsecured creditors without priority
Estimated losses on realization
Accts. Receivable (210,000-160,000) 50,000
Equipment (150,000-60,000) 90,000
Land and buildings (260,000-140,000) 120,000 260,000
Additional liabilities
Total losses on realization 271,000
Estimated gain on realization
Merchandise inventory (10,000)
Total estimated net loss 261,000
Loss absorbed by stockholders
Retained earnings (deficit) (205,000) ( 95,000)
Loss to be absorbed by unsecured creditors without priority or
Estimated deficiency to unsecured creditors 166,000
3. Total amount available to unsecured creditors

Cash 80,000
Accounts receivable ( 160,000 – 100,000) 60,000
Merchandise inventory 210,000
Equipment 60,000
Total to be available 410,000
Unsecured liabilities with priority
Wages payable 24,000
Taxes payable 76,000
Payable to trustee 11,000 (111,000)
Amount available to unsecured creditors w/o priority 299,000
Mortgage payable (205,000 – 140,000) 65,000

Total unsecured creditors without priority 465,000
Estimated recovery rate = Amt. available to unsecured creditors =

Total unsecured creditors without priority
= 299,000
465,000
= 64.30%
Problem 5 – Worthy Corporation
1. Total cash available 55,000
Unsecured liabilities with priority
Wages payable 8,000
Taxes payable 2,000
Liquidation expenses 4,000 14,000
Amount available to unsecured w/out priority 41,000
2. Accounts payable 30,000

Interest on notes payable 2,000
Total unsecured liabilities without priority 52,000
Amount available to unsecured liabilities w/out priority (41,000)
3. Estimated recovery rate = 41,000 = 78.85%

52,000
Problem 6 - Hopeless Corporation

Assets to be realized 55,000 Assets realized 70,000
Assets acquired 60,000 Assets not realized 25,000
Liabilities liquidated 60,000 Liabilities to be liquidated 90,000
Liabilities not liquidated 75,000 Liabilities assumed 30,000
Supplementary charges 78,000 Supplementary credits 85,000
Total 320,000 Total 300,000
______ Net loss 20,000
320,000 320,000
Problem 7 –Hopeless Corporation
Assets to be realized 75,000 Assets realized 90,000

Assets acquired 60,000 Assets not realized 45,000
Liabilities liquidated 85,000 Liabilities to be liquidated 90,000
Liabilities not liquidated 25,000 Liabilities assumed 30,000
Supplementary charges 78,000 Supplementary credits 125,00
0
Total 323,000 Total 380,00
0
Net income 57,000 ______
380,000 380,00
0
Problem 8 – Lazy Inc.
1. Liabilities to be liquidated 2,550,000

Retained earnings (deficit) ( 200,000)
Total 2,850,000
Assets to be realized (1,575,000)
Cash – Jan, 1 1,275,000
2.
Assets to be realized 1,575,000 Assets realized 1,400,000
Assets acquired 1,050,000 Assets not realized 1,225,000
Liabilities liquidated 2,875,000 Liabilities to be liquidated 2,550,000
Liabilities not liquidated 1,100,000 Liabilities assumed 1,425,000
Supplementary charges 3,125,000 Supplementary credits 3,850,000
Total 9,725,000 Total 10,450,000
Net income 725,000 ______
10,450,000 10,450,000
3. Liabilities not liquidated 1,100,000

Retained earnings (NI 725,000 – 200,000 525,000
Total 2,125,000
Assets not realized (1,225,000)
Cash balance, June 30 900,000
MULTIPLE CHOICE – THEORIES
1. D 6. D
2. A 7. D
3. D 8. B
4. D 9. B
5. B 10. B
MULTIPLE CHOICE – PROBLEMS

1. C 11. C 21. C
2. B 12. D 22. A
3. B 13. A 23. C
4. C 14. D 24. B
5. C 15. 67,994 25. A
6. B 16. A 26. A
7. C 17. B 27. C
8. 17,500 18. C 28. D
9. A 19. C 29. D
10. B 20. C 30. D
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CHAPTER 4 - CORPORATE LIQUIDATION

Assets Pledged to Partially Secured

Partially Secured Creditors

Unsecured creditors w/o priority

Estimated gains on realization

4. Expected recovery rate = Amount available to unsecured creditors without priority

5. Estimated amount payable to each class of creditor

Unsecured without priority - AP 200,000 x 54% = 108,000

2. Notes payable ( 100,000 – 75,000) 25,000

3. If we have an estimated deficiency to unsecured creditors, it means no amount will be

Assets pledged for fully secured liabilities (250,000-210,000) 40,000

2. No amount is payable to the stockholder. If there is a deficiency to unsecured creditors

3. Settlement per peso of unsecured creditors or estimated recovery rate =

3. Total amount available to unsecured creditors

Mortgage payable (205,000 – 140,000) 65,000

Estimated recovery rate = Amt. available to unsecured creditors =

2. Accounts payable 30,000

3. Estimated recovery rate = 41,000 = 78.85%

Problem 6 - Hopeless Corporation

Assets to be realized 75,000 Assets realized 90,000

Problem 8 – Lazy Inc.

1. Liabilities to be liquidated 2,550,000

3. Liabilities not liquidated 1,100,000

MULTIPLE CHOICE – PROBLEMS

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