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Chapter 5
Corporate Liquidation & Reorganization

NAME: Date:
Professor: Section: Score:

QUIZ:
1. It refers to the termination of business operations whereby an entity’s assets are disposed of in
order to settle all of the claims on the entity’s assets.
a. solidification
b. aquatation
c. dissolution
d. liquidation

2. Liabilities in the statement of affairs are classified into

a. Unsecured liabilities with priority
b. Fully secured creditors
c. Partially secured creditors
d. Unsecured liabilities without priority
e. All of these

3. The estimated recovery of partially secured creditors is equal to

a. the realizable value of the assets pledged plus the excess amount multiplied by the estimated
recovery percentage.
b. the realizable value of the assets pledged minus the excess amount multiplied by the estimated
recovery percentage.
c. their claims multiplied by the estimated recovery percentage.
d. any of these

Use the following information for the next four questions:

Andrix Asterix Co. has filed for voluntary insolvency and is going to liquidate. Andrix Asterix Co.’s
statement of financial position immediately prior to the liquidation process is shown below:
Andrix Asterix Co.
Statement of financial position
As of December 31, 20x0
ASSETS
Current assets:
Cash 160,000
Accounts receivable 880,000
Note receivable 400,000
Inventory 2,120,000
Prepaid assets 40,000
3,600,000
Noncurrent assets:
Land 2,000,000
Building, net 8,000,000
Equipment, net 1,200,000
11,200,000
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Total assets 14,800,000

LIABILITIES AND EQUITY
Current liabilities:
Accrued expenses 884,000
Current tax payable 1,400,000
Accounts payable 4,000,000
6,284,000
Noncurrent liabilities:
Note payable (secured by equipment) 1,200,000
Loan payable (secured by land and building) 8,000,000
9,200,000
Capital deficiency:
Share capital 2,000,000
Retained earnings (deficit) (2,684,000)
(684,000)
Total liabilities and equity 14,800,000

Additional information:
The following information was determined before the start of the liquidation process:
a. Only 76% of the accounts receivable is collectible.
b. The note receivable is fully collectible, and in addition interest of ₱40,000 is expected to be collected.
c. The inventory has an estimated selling price of ₱1,680,000 and estimated costs to sell of ₱40,000.
d. The prepaid assets are non-refundable.
e. The land and building have fair values of ₱8,000,000 and ₱3,200,000, respectively. However, Andrix
expects to sell both assets at a single price of ₱10,400,000. Costs to sell are negligible because the
prospective buyer agrees to shoulder all costs relating to the transfer of the property.
f. The equipment is expected to be sold at a net selling price of ₱800,000.
g. Administrative expenses of ₱120,000 are expected to be incurred in the liquidation.
h. The accrued expenses include accrued salaries of ₱100,000.
i. Interest of ₱60,000 is expected to be paid on the loan.
j. All the other liabilities are stated at their expected net settlement amounts.

4. How much are the total assets pledged to partially secured creditors?
a. 800,000
b. 3,140,000
c. 1,200,000
d. 400,000

5. How much are the total unsecured liabilities with priority?

a. 1,620,000
b. 220,000
c. 1,520,000
d. 100,000

6. How much are the total unsecured liabilities without priority?

a. 4,748,000
b. 4,884,000
c. 4,904,000
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d. 5,184,000

7. What is the estimated recovery percentage of unsecured creditors without priority?

a. 75.85% c. 70%
b. 31.71% d. 24.15%

Use the following information for the next three questions:

Use Andrix Asterix Co.’s statement of financial position in the preceding problem but ignore the
additional information. Instead, use the information provided below.

Andrix Co.’s liquidation was entrusted to a receiver. The receiver identified the following before the
start of the liquidation process:
a. Liquidation costs of ₱120,000 are expected to be incurred during the winding up of Andrix Co.’s
business affairs.
b. Interest of ₱40,000 is expected to be collected on the note receivable.
c. Interest of ₱60,000 is expected to be paid on the loan payable.

The following were the actual transactions during the period:

a. Only ₱660,000 have been collected on the accounts receivable; the remaining balance was written-
off.
b. Only 90% of the note receivable was collected; the remaining balance was written-off. The interest
was collected as expected.
c. Half of the inventory was sold for ₱1,200,000. Actual costs to sell were ₱20,000.
d. The prepaid assets were written-off.
e. The land and building were sold for ₱10,400,000.
f. The equipment was sold for ₱880,000.
g. Accrued expenses of ₱100,000 were paid. The balance remains outstanding.
h. The current tax payable was paid in full.
i. The loan payable and interest payable were paid in full.
j. The lender accepted ₱880,000 as full payment of the note payable.
k. Administrative expenses relating to the liquidation amounted to ₱108,000.

8. The statement of realization and liquidation will show total “assets to be realized” of
a. 14,640,000. c. 14,068,800 .
b. 14,800,000. d. 14,234,200.

9. The statement of realization and liquidation will show total “liabilities to be liquidated” of
a. 15,664,000. c. 15,544,000.
b. 15,484,000. d. 15,244,000.

10. The statement of realization and liquidation will show net gain (loss) for the period of
a. 112,000. c. (122,000).
b. 122,000. d. 0.

“Peace I leave with you; my peace I give you. I do not give to you as the world gives. Do NOT let your
hearts be troubled and do NOT be afraid.” (John 14:27)
- END -
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ANSWERS:
1. D
2. E
3. A
4. A Equipment at net selling price of 800,000

5. A
Solution:
Liquidation costs 120,000
Salaries payable 100,000
Current tax payable 1,400,000
Unsecured creditors w/ priority 1,620,000

6. D
Solution:
Excess of note payable (1.2M - 800K RV of equipt.) 400,000
Accrued exp., net of sal. (884K - 100K) 784,000
Accounts payable 4,000,000
Unsecured creditors without priority 5,184,000

7. C
Solution:
Net free assets
Estimated recovery percentage of unsecured
= Total unsecured liabilities without
creditors without priority
priority

Cash 160,000
Accounts receivable (880K x 76%) 668,800
Note receivable 400,000
Interest receivable 40,000
Inventory (1.68M - 40K) 1,640,000
Prepaid assets -
Land and building 10,400,000
Equipment 800,000
Total assets at realizable value 14,108,800
Less: Fully secured liabilities:
Loan payable (8,000,000)
Interest payable (60,000) (8,060,000)
Less: Partially secured:
Realizable value of equipment (800,000)
Total free assets 5,248,800
Less: Unsecured creditors w/ priority:
Liquidation costs (120,000)
Salaries payable (100,000)
Current tax payable (1,400,000) (1,620,000)
Net free assets 3,628,800

 3,628,800 ÷ 5,184,000 see previous solution = 70%

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8. A see solution below

9. B see solution below

10. A
Solution:
Debits Credits
Assets to be realized 14,640,000 13,520,000 Assets realized
Assets acquired 40,000 1,060,000 Assets not realized

Liabilities to be
Liabilities liquidated 10,440,000 15,484,000
liquidated
Liabilities not liquidated 4,784,000 60,000 Liabilities assumed

Supplementary expenses 108,000 - Supplementary income

Totals 30,012,000 30,124,000 Totals
Net gain - excess credits over debits 112,000

 Assets to be realized is ₱14,640,000, equal to the total book value of the assets, excluding cash,
transferred to the receiver (₱14,840,000 total assets less ₱160,000 cash).
 Assets acquired is ₱40,000, representing the previously unrecorded interest receivable.
 Assets realized is equal to the actual net proceeds from the sale of assets, as summarized below:
a. Collection of accounts receivable 660,000
b. Collection of the note and interest 400,000
c. Sale of half of the inventory 1,180,000
e. Sale of land and building 10,400,000
f. Sale of equipment 880,000
Assets realized 13,520,000

 Assets not realized is equal to the book value of the unsold inventory of ₱1,060,000 (₱2,120,000 x
50%).
 Liabilities to be liquidated is ₱15,484,000, equal to the total book value of the liabilities transferred
to the receiver.
 Liabilities assumed is ₱60,000, representing the previously unrecorded interest payable.
 Liabilities liquidated is equal to the actual settlement amounts of the liabilities settled, as summarized
below:
g. Payment for accrued expenses 100,000
h. Payment for current tax payable 1,400,000
i. Payment for loan and interest 8,060,000
j. Payment for note payable 880,000
Liabilities liquidated 10,440,000

 Liabilities not liquidated is equal to the total book value of the unsettled liabilities summarized
below:
Accrued expenses 784,000
Accounts payable 4,000,000
Liabilities to be liquidated 4,784,000
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 Supplementary expense is ₱108,000, the administrative expenses paid during the period.
 There is no supplementary income during the period.