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INTRODUCTION
Business failures take many forms, common one is the inability to settle financial obligations as they
become due. If the distressed company liquidates, it enters bankruptcy procedures that are court
administered because of legal ramifications. The process of corporate liquidation would include
realization of assets and the distribution of the cash proceeds, first to the different creditors, then the
balance to stockholders, if any. Generally, the cash provided would be less than the amount of all the
liabilities so a payment deficiency to creditors would occur. These activities are done by a court-
appointed trustee under accountability techniques. Actual liquidation, however, is preceded by a court-
petition for bankruptcy, voluntary, if filed by the distressed company itself; involuntary if initiated by its
creditors. The voluntary petition is submitted to the courts for resolution and a statement exhibiting the
petitioner’s debts and assets (at fair values) accompanies the petition. This statement is commonly called
the Statement of Affairs.
A liquidation is the process by which a reporting entity converts its assets to cash or other assets and
settles its obligations with creditors in anticipation of ceasing all activities. During this process, cash and
other assets are used to settle claims with any remaining assets distributed to the owners of the reporting
entity.
Liquidity refers mainly to a firm's ability to meet its short-term obligations, while solvency relates to the
longer time span of obligation. Both of these situations are interrelated. An auditor who examines the
financial statements of an enterprise with a history of losses and resulting financial difficulties and which
may even be in default of loan agreement covenants must, at some point, evaluate the enterprise's ability
to survive financially. If there is evidence that the ability of the enterprise to continue as a going concern
can no longer be safely assumed, the auditor may have to qualify his or her opinion, or, in some cases
disclaim an opinion.
A business enterprise can be insolvent in the conventional (or equity) sense when it is unable to pay off
its liabilities as they become due. The enterprise is insolvent in the legal sense when the financial
condition is such that the sum of the entity's debts is greater than all of such entity's property at fair
valuation. Thus, in the legal sense, an enterprise remains solvent as long as the fair value of its assets
exceeds its liabilities, even though the enterprise cannot meet its current maturing obligations because of
an insufficiency of liquid resources.
When the financial position of the debtor is such that it cannot resolve its financial difficulties by any of
the following quasi-reorganization, troubled-debt restructuring, and dacion-en-pago accounting, the
corporation will have to resort to liquidation. This process may be started by the debtor filing a debtor's
voluntary petition or creditor's involuntary petition.
Trustee in Bankruptcy. The duties of the trustee in liquidations are similar to those in reorganization
except that the focus is on a realization of assets and liquidation of liabilities rather than on preservation
and continuation of business. In addition, the trustee must assume control over the assets of the debtor,
convert assets into cash, and liquidate the business as expeditiously as is compatible with the best
interests of affected parties. In the course liquidation, the trustee may continue business activities, if that
is in the interest of an orderly liquidation
Reports Prepared in Corporate Liquidation:
1. Statement of Affairs
ASTRANS
Handouts 3-Corporate Liquidation
This statement is prepared as of a given point in time for a business enterprise entering into the stage of
liquidation. The purpose of this statement is to display the assets and liabilities and of the debtor
enterprise from a liquidation viewpoint because liquidation is the outcome of the bankruptcy proceedings.
Thus, assets displayed in the statement of affairs are valued at current fair values; carrying amounts are
presented on a memorandum basis.
2. Statement of Realization and Liquidation.
This is an activity statement that is intended to show progress, i.e., actual transactions toward the
liquidation of a debtor's estate. Its original purpose is to inform the bankruptcy court and interested
creditors of the accomplishments of the trustee. The Statement of Realization and Liquidation differs
from the Statement of Affair sin the following respects:
a. The statement of realization and liquidation reports the actual liquidation results. In contrast, the
statement of affairs is of a pro-forma nature and is based one estimates rather than actual results.
b. The statement of realization and liquidation provides an ongoing reporting of the trustee's
activities and is updated throughout the liquidation process. The statement of affairs is a summary
of the estimated results of a completed liquidation.
ASTRANS
Handouts 3-Corporate Liquidation
STATEMENT OF AFFAIRS
RUSTY CORP
Book Value ASSET FAIR VALUE FREE ASSET
Asset Pledged to Fully Secure Creditors
1,000,000 A. LAND 800,000
NOTES PAYABLE 700,000 100,000
Free Asset
200,000 CASH 200,000
400,000 NR 150,000
50,000 SUPPLIES 35,000 385,000
485,000
Less: With priority Creditors 160,00 160,000
Illustrative Problem 1
Hero Corp started its liquidation process on June 5, 2023. The balances of the accounts in the balance
sheet are as follows:
Cash 40,000 Prepaid Rent 12,000
Accounts Receivable 80,000 Inventory 120,000
Land 1,200,000
The rest of the assets has same amount of fair value with their book value.
The following information is available on June 1, 2023 to Omega Company, which is having difficulty in
paying its liabilities as they become due:
Carrying Amount
Cash ₱8,960
Accounts receivable, net, fair value equal to carrying amount 103,040
Inventories, current fair value, ₱40,320 pledged on ₱47,040 of notes payable 87,360
Machinery and equipment, net, current fair value of ₱150,976 pledged on
mortgage note payable 239,680
Office supplies, current fair value of ₱5,600 4,480
Wages payable 12,992
Taxes payable 2,688
Accounts payable 134,400
Notes payable, ₱47,040 of which is secured by inventories 89,600
Mortgage note payable 112,896
Common stock, ₱5 par 224,000
Retained earnings, deficit 133,056
Additional information:
REQUIRED:
Compute for the following:
a. Net free assets
b. Liabilities to:
1. Fully secured creditors
2. Partially secured creditors
3. Unsecured creditors with priority
4. Unsecured creditors without priority
c. Recovery percentage of unsecured liabilities without priority
d. Amount of recovery of the following:
1. Fully secured creditors
2. Partially secured creditors
3. Unsecured creditors with priority
4. Unsecured creditors without priority
PROBLEM 1
ASTRANS
Handouts 3-Corporate Liquidation
On July 1, 2023, the records of Tumble Co and CPAs, related to bankruptcy for B Corporation,
showed the following:
Cash P 57,400
Assets to be realized: Asset Realized
Furnitures 70,000 33,000
Buildings 301,000 105,000
Machinery 196,000 ?
Copyright 30,800 84,000
Liabilities to be liquidated:
Accounts payable 560,000
Notes payable 280,000 (5% interest)
During July, the machinery having a book value of P105,000 for P61,600. The rest of the
machinery had no sale value and sold the copyright for P84,000. Total interest payable from all
sources from January to date of bankruptcy was P 12,000. Tumble paid P 9,100 as trustee fee
and P17,000 as taxes. The proceeds from the sale of the machine were paid to Notes Payable
holder.
Compute the estimated % of recovery?
PROBLEM 2
A review of the assets and liabilities of G Company in bankruptcy on June 30, 2008, discloses
the ff:
A. A mortgage payable of P118,000, is secured by building valued at P39,000 less than its
book value of P172,000.
B. Notes payable of P57,000 is secured by furniture and equipment with a book value of
P76,000 that is 3/5 realizable.
C. Assets other than those referred to have an estimated value of P44,000, an amount that is
75% of its book value
D. Liabilities other than those referred to total P91,000, which included claims with priority
of P23,000.
How much was paid to the partially secured creditors?
PROBLEM 3
The Eguls Corporation, which is undergoing liquidation, has the following condensed balance sheet as of
July 1, 2022:
Assets Liabilities and Shareholders’ Equity
Cash P 396,000 Salaries Payable P120,000
Receivables(net) 924,000 Accounts Payable 300,000
Inventory 231,000 Bonds Payable 270,000
Prepaid Expenses 3,000 Bank Loan Payable 1,200,000
ASTRANS
Handouts 3-Corporate Liquidation
The bank loan payable is secured by the equipment having a book value of P 600,000 and a realizable
value of P 530,000. The rest of the equipment can be sold at a price of P 118,000.Of the accounts payable,
P140,000 is secured by inventory which has a cost of P120,000 and a liquidation value of P132,000. The
balance of the inventory has a realizable value of P70,000. Receivables with a book value and realizable
value of P624,000 and P600,000 respectively have been pledged as collateral on the note payable. The
balance of the receivable is estimated to be 60% collectible. In addition to the recorded liabilities are
accrued interest on bank loan payable amounting to P 30,000, accrued interest on the bonds payable
amounting to P18,000, trustee’s fee amounting P25,000 and taxes payable amounting to
P21,000.Compute the amount paid to partially secured creditors.