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Chapter 5 PROBLEM 3: EXERCISE

1. Solutions:
Corporate Liquidation & Reorganization
Requirement (a): Statement of affairs
Available
PROBLEM 1: TRUE OR FALSE Book Realizabl for
1. FALSE – see solution below ASSETS
values e values unsecured
creditors
2. TRUE Assets pledged to fully secured creditors:
Total assets @ realizable value (100 5,000,00
Land and building 5,200,000
x 90%) 90 0
(4,000,00
Loan payable
Total priority claims 0)
(60)
Interest payable (30,000) 1,170,000
Net free assets
30
Total non-priority claims (150 - 60) Assets pledged to partially secured creditors:
90 600,00 400,00
Estimated deficiency recovery 33.33% Equipment, net -
0 0

3. FALSE (40 asset @ carrying amt. x 90%) = 36 Free assets:

realizable value; 80,00
Cash
80,00
36 realizable value vs. 30 loan = 30 loan is fully secured. 0 0
440,00
Accounts receivable 334,400
0
4. TRUE 200,00
⮚ (10 asset @ carrying amt. x 90%) = 9 realizable value; Note receivable 200,000
0
⮚ 9 realizable value vs. 15 note = note is partially 20,00
Interest receivable
secured; - 0
⮚ 9 secured + (6 unsecured x 1/3 recovery see solution 1,060,00
Inventory 820,000
above) = 11 0
20,00
Prepaid assets - 1,454,400
0
5. TRUE – shareholders are paid last; if the unsecured
Total free assets 2,624,400
non-priority creditors can only expect to recover 1/3
Less: Unsecured
of their claims, the shareholders will recover nothing. (810,000
liabilities with priority
)
(see below)
Net free assets 1,814,400
PROBLEM 2: MULTIPLE CHOICE – THEORY Estimated deficiency (squeeze)
1. D (2,592,000 – 1,814,400) 777,600
7,400,00
2. A 2,592,000
0
3. A
4. D
5. D Unsecured
Book LIABILITIES AND Realizabl non-
values EQUITY e values priority
liabilities
Unsecured liabilities with priority:
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Administrative 60,0 (777,60

- expenses 00 0)
50,00 50,0
0 Accrued salaries 00
700,00 700,00
0 Current tax payable 0 Requirement (c): Estimated recovery percentage
Total unsecured 810,00
liabilities with priority 0 - Net free assets
Estimated recovery
Total unsecured
percentage of unsecured =
liabilities without
Fully secured creditors without priority
creditors:
priority
4,000,00 4,000,00
Loan payable 1,814,400 ÷ 2,592,000 = 70%
0 0
30,0
Interest payable
00 -
Requirement (d): Mr. A’s recovery
Partially secured creditors: 500,000 x 70% = 350,000
600,00
600,000
0 Note payable
Equipment, net (400,000) 200,000

Unsecured creditors 2. Solutions:

392,00 Accrued expenses, net
392,000 Requirement (a):
0 of accrued salaries i. opening journal entry
2,000,00
Accounts payable 2,392,000 Jan. Cash 80,000
0 2,000,000 1,
Total unsecured 20x1
Accounts receivable 440,000
2,592,000 Note receivable 200,000
creditors
Inventory 1,060,0
(342,00 Prepaid assets 00
- -
0) Shareholders' equity Land 20,000
7,400,00 Building 1,000,0
2,592,000
0 Equipment 00
Estate deficit (squeeze) 4,000,0
Accrued expenses 00 442,000
Requirement (b): Estimated deficiency Current tax payable 600,000 700,000
777,600 (see statement above) Accounts payable 342,000 2,000,0
Note payable 00
or (Alternative solution) Loan payable 600,000
4,000,0
7,054,40 00
Total assets at realizable values 0
ii. journal entry for new assets and liabilities
Total liabilities at settlement (7,832,00 Jan. Interest receivable 20,000
amounts 0) 1,
20x1
Estate deficit 20,000
Estimated deficiency
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Jan. Estate deficit 30,000 realized:

1, Interest 530,
20x1
Interest payable 30,000
receivable 20,000 Inventory 000

iii. compound journal entry for the transactions LIABILITIES

Jan. Cash 1,486,00 Liabilities liquidated: Liabilities to be liquidated:
1 to
Jun
Accrued expenses (acc. salaries 0(a) Accrued expenses 50,000 Accrued expenses 442,000
e only) 50,000 Current tax Current tax payable
30, Current tax payable 700,000 payable
700,000 700,000
20x Note payable 600,000 Interest payable Accounts payable 2,000,00
1 30,000
Loan payable 4,000,00 0
Interest payable 0 440,00 Loan payable 4,000,00 Note payable
600,000
Accounts receivable 0
30,000 0 Note payable Loan payable 4,000,00
Note receivable 200,00 440,000
0
Interest receivable 0 Total 5,220,00 Total 7,742,00
Inventory (1.06M x 50%) 20,000 0 0
Prepaid assets 530,00
Land 0 Liabilities
Building 20,000 Liabilities not liquidated: assumed:
Equipment 1,000,0 Accrued expenses 392,000 Interest payable 30,000
Estate deficit (squeeze) 00 2,000,00
Accounts payable 0
4,000,0 2,392,00
00 Total 0
600,00
0 SUPPLEMENTARY ITEMS
56,000 Supplementary expenses: Supplementary income:
(a)
(75% x 440K) + (20K + 180K) + 590K + 5.2M + 440K – 50K – Administrative
54,000
700K – (4M + 30K) – 440K – 54K = 1,486,000 expenses -
Net gain during
the 56,000
Requirement (b): period
ASSETS
Assets to be realized: Assets realized: 15,062,00 15,062,0
Accounts 0 00
440,000 330,000
receivable Accounts receivable
Note receivable 200,000 Note receivable 180,000 Requirement (c):
1,060,00
Inventory 20,000 Cash
0 Interest receivable
Prepaid assets 20,000 590,000
Beg. bal. 80,000
Inventory
5,000,00 5,200,00 Assets 6,760,0 5,220,0
Land and building realized 00 00 Liabilities liquidated
0 Land and building 0
Equipment, net 600,000 Equipment 440,000 Administrative
7,320,00 6,760,00 54,000 expenses
Total 0 Total 0 1,566,
000
Assets acquired: Assets not
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Requirement (d):
Estimated deficiency (697,000)
Estate deficit
342,
opening 000 Accounts payable @ book value
(a)
1,600,000
new 30, 20, Discount (23,000)
liability 000 000 new asset Waived (420,000)
56, Accounts payable @ expected
000 transactions settlement amt. 1,157,000
29
6,000 end.
2. A
ASSETS = LIABILITIES + EQUITY Solution:
Cash
1,566,0 (squeez Liabilities not 2,392,0 (star Cash 100,000
00 e) liq. 00 t)
Assets not 530,00 (296,00 Accounts receivable (600K x 60%) 360,000
real. 0 Estate deficit 0) Inventory (1.56M x 50%) 780,000
2,096,00 2,096,0
Total 0 Total 00 Land and building 2,300,000
Equipment, net (400K - 70K refurbishment) 330,000
Total assets @ realizable values 3,870,000
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. B Income tax payable 780,000
Solution:
Note & interest (realizable value of equpt.) 330,000
Cash 100,000
Loan payable 1,200,000
Accounts receivable (600K x 60%) 360,000
Interest payable on loan 70,000
Inventory (1.56M x 50%) 780,000
Estimated liquidation costs 120,000
Land and building 2,300,000
SSS, PhilHealth & Pag-IBIG 160,000
Equipment, net (400K - 70K refurbishment) 330,000
Total secured & priority claims 2,660,000
Total assets @ realizable values 3,870,000

Net free assets 1,210,000

Accounts payable (a) 1,157,000
Income tax payable (amt. payable on tax
amnesty) 780,000
Note payable 1,000,000
Loan payable 1,200,000 3. C
Interest payable (80K + 70K) 150,000 Solution:
Net free assets
Estimated liquidation costs 120,000 Estimated recovery
Total unsecured
SSS, PhilHealth & Pag-IBIG 160,000 percentage of unsecured =
liabilities without
Total liabilities @ expected net settlement creditors without priority
priority
amounts 4,567,000
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= 1,210,000 (see below) ÷ 1,907,000 (see below) = IBIG 000

63.45% 900,00 780,00
0 Income tax payable 0
Total unsecured 1,060,
330,000 realizable value of equipment + (750,000 liabilities with priority 000 -
unsecured see below x 63.45%) = 805,875

Available Fully secured

Book Realizablfor creditors:
ASSETS 1,200,00 1,200,00
values e values
unsecured Loan payable
creditors 0 0
Assets pledged to fully secured creditors: 70,0
- Interest payable
2,000,00 00 -
Land and building 2,300,000
0
(1,200,00 Partially secured creditors:
Loan payable
0) 1,000,
Interest payable (70,000) 1,030,000 1,000,000
000 Note payable
- Interest payable 80,000
Equipment, net (330,000) 750,000
Assets pledged to partially secured creditors:
400,00 Equipment, net (400K – 330,00
- Unsecured creditors without
0 70K) 0
priority:
1,600,00 1,157,000
Free assets: Accounts payable (a) 1,157,000
0
100,0 100,0
Cash Total unsecured creditors without
00 00 1,907,000
priority
600,00 Accts. receivable (600K x
360,000
0 60%)
1,560,00 (40,000) Shareholders' equity - -
Inventory (1.56M x 50%) 780,000 1,240,000 4,660,00
0 1,907,000
0
Total free assets 2,270,000
Less: Unsecured
(1,060,00 (a)
Accounts payable @ book value 1,600,000
liabilities with priority
0)
(see below) Discount (23,000)
Net free assets 1,210,000 Waived (420,000)
Estimated deficiency (squeeze) Accounts payable @ expected
(1,907,000 – 1,210,000) 697,000 settlement amt. 1,157,000
4,660,00
1,907,000
0

4. D - 80,000 x 63.45% see previous solution = 50,760

Unsecured
Book LIABILITIES AND
Expected
non- 5. B
settleme Solution:
values EQUITY priority
nt Available for
liabilities Realizable
Unsecured liabilities with priority: unsecured
value
120, creditors
- Liquidation costs 000 Assets pledged with fully
- SSS, PhilHealth & Pag- 160, secured creditors 190,000
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Fully secured creditors (130,000) 60,000

7. C
Free assets 140,000 Solution:
Total free assets 200,000 Net free assets
Estimated recovery
Liabilities with priority (20,000) Total unsecured
percentage of unsecured =
Net free assets 180,000 liabilities without
creditors without priority
priority
(a)
65% = Net free assets ÷ 650,000
Net free assets = 422,500
Secured and Unsecured
Priority liabilities without (a)
claims priority
Partially secured Supplier Expected net settlement
100,000 s amounts
creditors
Assets pledged with Athena
partially secured (60,000) Co. (600K - 100K) 500,000
creditors 40,000 80K representing
Riley Co. goods 80,000
Unsecured creditors 260,000 Naia Co. (120K - 50K) 70,000
Total unsecured
Total 650,000
liabilities without
priority 300,000

Net free assets 180,000 8. A

Divide by: Total unsecured liabilities Solution:
300,000
without priority Assets to be realized
Recovery percentage 60.00%
Accounts receivable 600,000
Inventory 900,000
Assets pledged with partially secured Equipment, net 400,000
creditors 60,000
Partially secured creditors 100,000 Total 1,900,000
Assets pledged with partially secured
creditors (60,000)
Excess to be paid from net free assets 40,000 Assets acquired -
Multiply by: Recovery percentage 60.00% 24,000
Total amount paid to partially
Assets realized
secured creditors 84,000
[(600K x 90%) -
Accounts receivable
108K] 432,000
[(900K x 1/2) x
Inventory
6. D 80%] 360,000
Solution: Equipment, net (380K - 50K) 330,000
Unsecured creditors 260,000 1,122,00
Multiply by: Recovery percentage 60.00% Total Total 0
Amount paid to unsecured creditors 156,000
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Assets not realized

9. C
Accounts receivable (600K x 10%) 60,000 Solution:
Inventory (900K x 1/2) 450,000 Debit Credit
s s
Total 510,000
1,900,0 1,122,0
Assets to be realized Assets realized
00 00
Liabilities to be Assets acquired -
510,00 Assets not
liquidated 0 realized
1,180,0 3,100,0
Accounts payable 1,600,000 Liabilities liquidated Liabilities to be liq.
00 00
Loan payable 1,500,000 1,520,0 100,00 Liabilities
Liabilities not liquidated
00 0 assumed
Total 3,100,000 Supplementary
Supplementary expenses 50,000 10,000
inc.
4,650,0 4,842,0
Liabilities assumed Totals
00 00
Totals
Employee termination Net gain - excess of Cr. 192,00
benefits 100,000 over Dr. 0
Total 100,000
Optional reconciliation:
Gain (Loss)
Liabilities liquidated (108,
Accounts payable 100,000 A/R (the commission paid) 000)
Loan payable 1,000,000 (90,
Employee termination Inventory (900K x 50% x 20%) 000)
benefits 80,000
Equipment (380K - 50K - 400K) (70,000)
Total 1,180,000
Loan (1.5M - 1M) 500,000
Liabilities not
liquidated Liquidation costs (50,000)
Accounts payable (1.6M - .1M) 1,500,000
Employee termination Scrap materials 10,000
benefits (100K - 80K) 20,000
Net gain 192,000
Total 1,520,000

Supplementary
expenses 10. B
Liquidation costs 50,000 Solution:
Cash
Supplementary income Beg. bal. 100,000
Sale of scrap materials 10,000 Assets realized 1,122,000 1,180,0 Liabilities
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00 liquidated PROBLEM 5: FOR CLASSROOM DISCUSSION

Sale of scrap 50,000 Liquidation costs
10,000 1. Solutions:
2,000
Requirement (a):
Assets pledged to fully secured creditors:
1,300,0
Land 00

Assets pledged to partially secured creditors:

150,00
Equipment - net 0

2,100,00
Total assets at realizable value 0
Less: Secured creditors:
(750,000
Fully secured - Loan payable )
Partially secured - Note payable (up to the RV of (150,000
equipt. only) )
1,200,0
Total free assets 00
Less: Unsecured creditors with priority:
(180,000
Estimated administrative expenses )
(800,000
Salaries payable )
Net free assets 220,000

OR
Excess of the RV of land over loan payable 550,000
Cash 200,000
Accounts receivable 450,000
1,200,00
Total free assets 0
Less: Unsecured liabilities with priority:
Estimated administrative expenses (180,000)
Salaries payable (800,000)
Net free assets 220,000

Requirement (b):

Unsecured liabilities with priority:

Administrative expenses 180,000
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Salaries payable 800,000

980,000
Fully secured creditors:
Loan payable 750,000

Partially secured creditors:

Notes payable 500,000

Unsecured liabilities without priority:

Note payable - excess (500K – 150K RV of equipment) 350,000
Accounts payable 700,000
1,050,00
0

Requirement (c):
Net free assets (see above) 220,000
(1,050,0
Unsecured liabilities without priority (see above) 00)
Deficiency to unsecured non-priority (830,00
creditors 0)

OR
2,100,00
Total assets at realizable value 0
Total liabilities at settlement amt. (2.75M + 180K (2,930,00
adm. Exp.) 0)
Estimated deficiency to unsecured non- (830,00
priority creditors 0)

Requirement (d):

Net free assets

Estimated recovery
Total unsecured
percentage of unsecured =
liabilities without
creditors without priority
priority

= 220,000 ÷ 1,050,000 = 20.95%

Requirement (e):
500,000 x 20.95% = 104,750
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Requirement (f): )
BYE-BYE CORPORATION
STATEMENT OF AFFAIRS Unsecured creditors:
AS OF JANUARY 1, 20X1 700,000 Accounts payable 700,000 700,000
Available
Realiza for (450,000) Shareholders' equity - -
Book ble unsecured 2,300,00
values ASSETS values creditors 0 Totals 1,050,000
Assets pledged to fully secured creditors:
1,300,00 2. Solutions:
1,000,000 Land 0 Requirement (a):
(750,000 i. opening journal entry
Loan payable ) 550,000 Jan. Cash 200,000
1,
Assets pledged to partially secured creditors: 20x1
Accounts receivable 500,000
600,000 Equipment - net 150,000 Equipment – net 600,000
(500,000 Land 1,000,0
Notes payable ) - Estate deficit (squeeze) 00
Accounts payable 450,000 700,000
Free assets: Salaries payable 800,000
200,000 Cash 200,000 Notes payable 500,000
500,000 Accounts receivable 450,000 650,000 Loan payable 750,000
Total free assets 1,200,000
Less: Unsecured ii. journal entry for new assets and liabilities
liabilities
with priority (see
Jan. Estate deficit 30,000
1,
below) (980,000) 20x1
Interest payable 30,000
Net free assets 220,000
Estimated deficiency
(squeeze) 830,000 iii. journal entries for the transactions
2,300,00 (a) Cash 280,000
0 Totals 1,050,000 Estate deficit 120,000
Accounts receivable 400,000
Unsecured
Realiza non-
(b) Cash 150,000
Book ble priority Estate deficit 450,000
values LIABILITIES values liabilities Equipment 600,000
Unsecured liabilities with priority:
- Administrative expenses 180,000 Notes payable 500,000
800,000 Salaries payable 800,000 - Cash 150,000
Estate deficit 350,000
Fully secured (c) Cash (1.5M – 100K) 1,400,0
creditors: Land 00 1,000,0
750,000 Loan payable 750,000 -
Estate deficit 00
400,000
Partially secured
creditors: Loan payable
500,000 Notes payable 500,000 Interest payable 750,000
Equipment - net (150,000 350,000 Cash 30,000
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780,000 (d) Accounts payable (700K x ½) 350,000

Salaries payable (800K x ¼) 200,000
Cash 550,000
(e) Estate deficit 240,000
Cash 240,000

Requirement (b):
ASSETS
Assets to be realized: Assets realized:
Accounts
500,000 280,000
receivable Accounts receivable
Equipment, net 600,000 Equipment 150,000
1,000,00 1,400,00
Land
0 Land 0
2,100,00 1,830,00
Total 0 Total 0

Assets not
Assets acquired: realized:
100,
- Accounts receivable 000

LIABILITIES
Liabilities liquidated: Liabilities to be liquidated:
Accounts payable 350,000 Accounts payable 700,000
Salaries payable 200,000 Salaries payable 800,000
Note payable 150,000 Note payable 500,000
Loan payable 750,000 Loan payable 750,000
Interest payable 30,000
Total 1,480,00 Total 2,750,00
0 0

Liabilities
Liabilities not liquidated: assumed:
Accounts payable 350,000 Interest payable 30,000
Salaries payable 600,000
Total 950,000

SUPPLEMENTARY ITEMS
Supplementary expenses: Supplementary income:
Liquidation costs 240,000 -
Net loss for the year 60,000

4,770,000 4,770,00
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0 OR
Estate deficit
450,
opening 000
Requirement (c): new 30,
Cash liability 000
Beg. bal. 200,000 (a) 120,000
Assets 1,830,0 1,480,0 (b) 450,000 350,000 (b)
realized 00 00 Liabilities liquidated (e) 240,000 400,000 (c)
Administrative 540
240,000 expenses ,000 end.
310,00
0 ❖ RECONCILIATION:
ASSETS = LIABILITIES + EQUITY
310,00 (squeez Liabilities not 950,00 (start
OR Cash
0 e) liq. 0 )
Cash Assets not 100,0 (540,00
real. 00 Estate deficit 0)
Beg. bal. 200,000 410,00 410,00
(a) 280,000 Total 0 Total 0
(b) 150,000 150,000 (b)
1,400,0
(c) 00 780,000 (c)
550,000 (d)
240,000 (e)
310,00
0

Requirement (d):

Estate deficit
450,
opening 000
new 30,
-
liability 000 new asset

transaction 60,000
s*
540
,000 end.

* From journal entries (a) to (e): 120K + 450K – 350K –

400K + 240K = 60K net debit