COLLEGE OF ACCOUNTANCY AND FINANCE Page 1

ACCO 30103 – Advanced Financial Accounting and Reporting

CORPORATE LIQUIDATION

Statement of Affairs – is in effect a statement of financial position from a “quitting concern”

point of view. The assets are reported at their estimated realizable value instead of book
value. They are reported as pledged with certain creditors or free assets available to general
creditors. The liabilities are reported at their balance sheet amounts listed in terms of their
rank as obligations preferred, secured or unsecured.

Information needed:
1. Balance Sheet
2. Supplementary information such as:
a. Estimates and Appraisals from reliable sources
b. Pledges of Assets
c. Obligations that are expected to emerge in the course of liquidation

Assets in the Statement of Affairs:

1. Assets Pledged with Fully Secured Creditors – Assets that have been pledged but
that are expected to be realized at more than the amount of the claims on which they are
pledged.
2. Assets Pledged with Partially Secured Creditors – Assets that have been pledged but
that are expected to be realized at more than the amount of the claims on which they are
pledged.
3. Free or Unpledged Assets – Assets that have not been pledged and are not related to
individual liability terms.

Assets Side Columns:

1. Book Value of Assets
2. Name of Assets
3. Appraised Value of Assets
4. Estimated amount available for unsecured creditors
5. Estimated gain/loss on realization

Liabilities and Equity in the Statement of Affairs:

1. Preferred Creditors – Claims that must be provided in full before anything may be paid
to remaining unsecured claims (by law).
2. Fully Secured Creditors – Claims that have been pledged certain assets that are
expected to realize as much or more than the amount of the claims.
3. Partially Secured Creditors – Claims that have been pledged certain assets that are
expected to realize less than the amount of the claims.
4. Unsecured Creditors – Claims that carries no legal priority and on which there is no
assets pledged.
5. Contingent Liabilities – Any contingent liabilities which are expected to develop into
actual liabilities.
6. Capital – Balances summarizing the interests of owners of the business.

Liabilities and Equity Columns:

1. Book Value of Liabilities and Capital
2. Name of Liabilities and Capital
3. Amount of Unsecured Liability

Procedures:
1. Section Headings should be first be set up.
2. Each liability should be considered and reported in the appropriate liability section.
3. After all liabilities have been considered together with assets pledged on such claims, all
remaining assets represent unpledged items and may be listed as such.
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ACCO 30103 – Advanced Financial Accounting and Reporting

4. Asset and liability data are summarized and the statement is completed.

Deficiency Statement – This statement is prepared to accompany the Statement of Affairs.

It summarizes the sources of deficiency such as:
• Losses on Realization
• Additional liabilities and liquidation expenses
• Losses to be borne by owners

TRUSTEESHIP

An independent body (trustee or receiver) is appointed by court to take over the assets of
the insolvent corporation to protect the equities and rights of all parties concerned.

Proforma Entries:

Debtor’s Book:
Trustee’s Account xxx
Allowance for Doubtful Accounts xxx
Accumulated Depreciation xxx
Current Assets xxx
Non-Current Assets xxx

Trustee’s Book:
Current Assets xxx
Non-Current Assets xxx
Allowance for Doubtful Accounts xxx
Accumulated Depreciation xxx
Debtor’s Account xxx

Note: Only assets are transferred to the books of the trustee. The original liabilities and the
stockholder’s equity
accounts are left on the company records.

If the trustee is able to restore the financial solvency, the control of the assets is returned to
the former owners, HOWEVER, if solvency cannot be restored, then the corporation will be
liquidated.

STATEMENT OF REALIZATION AND LIQUIDATION

It is a summary of the course of operations of a business under the administration of a

trustee and involving the realization of assets and liquidation of obligation.

ASSETS
Assets to be Realized: Assets Realized:
(BV of Non-Cash Assets) (Net proceeds of assets sold)
Assets Acquired: Assets not Realized:
(Additions to assets during liquidation period) (BV of unsold non-cash assets)

LIABILITIES
Liabilities Liquidated: Liabilities to be Liquidated:
(Paid liabilities) (BV of liabilities)
Liabilities not Liquidated: Liabilities Assumed:
(Unpaid liabilities) (Additional obligations incurred during
liquidation period)
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ACCO 30103 – Advanced Financial Accounting and Reporting

REVENUES AND EXPENSES

Supplementary Charges: Supplementary Credits:
(Purchases and expenses) (Sales and other expenses)

If total debits are greater than total credits, there is loss on realization; however, if total
credits are greater than total debits, there is a gain on realization.

PROBLEMS

1. LUGENA Company is being liquidated. The following information is related to the

liquidation:
• Bonds payable amounting to P73,600 is secured by merchandise inventory with a
book value of P123,000 and net realizable value of 2/3 of the recorded amount.
• Of the 195,600 accounts payable, P55,000 is secured by equipment with carrying
value of P76,800 which is 70% realizable.
• Building with carrying value of P129,000 has a net realizable value of P99,000.
• Other recorded liabilities are: accrued interest on bonds – P3,100; salaries payable –
P17,400; taxes payable - P11,600 and liquidation expenses – P8,500.
• Cash available prior to liquidation amounts to P11,900.
• Total assets of the company prior to liquidation amounts to P480,000. Except for
prepaid expenses of P7,600 and goodwill of P22,000 which has no value, the
remaining assets have a net realizable value equivalent to 60% of the recorded
amount.
• Total liabilities of the company prior to liquidation amounts to P380,000.

Determine the following:

a. How are the liabilities classified?
b. Gain/Loss on Realization
c. Amount Available to Unsecured Creditors
d. Percentage of Recovery
e. Amount payable to Partially Secured Creditor

2. The listings of assets and liabilities of Piyupi Company on June 30, 2022 along with
estimated realizable values are as follows:
BV NRV
Cash 240,000 240,000
Accounts Receivable 630,000 480,000
Inventories 600,000 530,000
Equipment 450,000 180,000
Land and Building 750,000 420,000
Other Assets 30,000 0
Total 2,700,000

Accounts Payable 1,200,000

Notes Payable 300,000
Wages Payable 72,000
Taxes Payable 228,000
Mortgage Payable 615,000
Share Capital 900,000
Retained Earnings (Deficit) (615,000)
Total 2,700,000
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ACCO 30103 – Advanced Financial Accounting and Reporting

Additional Information:
• Accounts Receivable are pledged as security for the notes payable.
• The mortgage payable is secured by the Land and Building.
• Liquidating Expenses are expected to be P35,000.
• Unrecorded Liabilities amounting to P20,000 is to be recognized.

Determine the following:

a. Gain/Loss on Realization
b. Fully Secured Liabilities
c. Partially Secured Liabilities
d. Unsecured Liabilities
e. Amount Available to Unsecured Creditors
f. Percentage of Recovery
g. Amount payable to Partially Secured Creditor
h. Statement of Deficiency

3. The Balance Sheet of CAF Company at June 30, 2022 is as follows:

Cash 400,000
Accounts Receivable 700,000
Inventories 500,000
Prepaid Rent 50,000
Land and Building 2,300,000
Machinery 600,000
Patent 450,000
Total 5,000,000

Accounts Payable 1,100,000

Wages Payable 600,000
Real Estate Tax Payable 100,000
Notes Payable 550,000
Mortgage Payable 1,650,000
Share Capital 2,000,000
Retained Earnings (Deficit) (1,000,000)
Total 5,000,000

Additional Information:
• The company estimated that P630,000 is the maximum amount collectible for the
accounts receivable.
• Except for 20% of the inventory that are damaged and worth only P20,000, the cost
of the other items is expected to be recovered in full.
• The land and building have a net realizable value of P1,700,000 and are subject to
the mortgage payable.
• The appraised value of the machinery is P200,000.

Determine the following:

a. Gain/Loss on realization
b. Amount available to Unsecured Creditors
c. Estimated settlement per peso of unsecured liabilities
d. Amount recoverable by each class of creditors

4. Golden State Company is in bankruptcy and is being liquidated. The financial report was
prepared before the final cash settlement:
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ACCO 30103 – Advanced Financial Accounting and Reporting

Cash P1,000,000

Claims:
Mortgage payable secured by equipment that was sold for P500,000 800,000
Unsecured Accounts Payable 500,000
Administrative Expenses 80,000
Salaries Payable 20,000
Interest Payable 100,000

Show how the P1,000,000 cash will be distributed to the holders of each claim.

5. PiYuPi Company provides the following balance sheet as of June 30, 2022:
Current Assets (NRV of P2,500,000) 3,200,000
PPE (NRV of P4,500,000) 7,500,000
Other Assets (NRV P200,000) 650,000
Total 11,350,000

Accounts Payable (secured by Inventories with NRV of P1,600,000) 4,600,000

Loans Payable (secured by PPE with NRV of P2,800,000) 5,000,000
Ordinary Shares 3,000,000
Retained Earnings (Deficit) (1,250,000)
Total 11,350,000

Determine the following:

a. Amount available to Unsecured Creditors
b. Estimated Deficiency
c. Amount expected to be received by Accounts Payable Creditors

6. A review of the assets and liabilities of ABC Company discloses the following:
• A mortgage payable of P700,000 I secured by land and building valued at
P1,120,000.
• Notes Payable of P350,000 is secured by furniture and equipment at P280,000.
• Assets other than above have estimated market value of P315,000.
• Liabilities other than above total P840,000 which included preferred claims of
P105,000.

Determine the Estimated Percentage of Recovery.

7. The creditors of BSA Company agreed to the following concession in recognition of

BSA’s deteriorating financial condition:
• ABC Corporation, one of BSA’s suppliers, agreed to accept merchandise at its
normal selling price of P1,350,000 in full satisfaction of P1,458,000 overdue accounts
receivable from BSA. The cost of the merchandise to BSA was P1,080,000. ABC’s
accounts receivable from BSA included a P135,000 allowance for doubtful accounts.
• Philippine Prudential Bank, agreed to accept 2,000 shares of BSA’s P450 par
ordinary shares with a current market price of P900 per share in full satisfaction of
P2,025,000 note and P180,000 accrued interest due from BSA. PPB has provided a
P450,000 allowance for this note.

Determine the total gain or loss resulting from the concession.

8. The following are the data presented by Jasmin Company:

Assets at Book Value 1,250,000
Assets at NRV 937,500
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ACCO 30103 – Advanced Financial Accounting and Reporting

Liabilities at Book Value:

Fully Secured Mortgage 500,000
Unsecured Accounts and Notes Payable 562,500
Unrecorded Liabilities:
Interest on Bank Notes 3,125
Estimated administrative expense 50,000

Determine the amount of Estimated Deficiency.

9. BSA Company is insolvent and its statement of affairs show:

Estimated gain on realization of assets 2,000,000
Estimated loss on realization of assets 2,560,000
Additional assets 1,200,000
Additional liabilities 960,000
Share Capital 12,000,000
Deficit 11,200,000

Determine the pro-rata payment to stockholders.

10. Below is the summary accounts appearing in the Statement of Realization and
Liquidation of PiYuPi Company:
Assets to be realized 5,200,000
Assets not realized 2,700,000
Assets realized 3,800,000
Assets acquired 1,800,000
Liabilities to be liquidated 4,200,000
Liabilities not liquidated 1,900,000
Liabilities assumed 900,000
Liabilities liquidated 2,500,000
Supplementary charges 850,000
Supplementary credits 600,000

Determine the Gain/Loss on Realization.

11. Palugi Company was unable to pay its current obligations as they become due. SM
Company was appointed as trustee on January 2, 2022. Creditors and stockholders
agree that an attempt should be made to rehabilitate the business assets, pay off the
creditors and distribute remaining funds to the stockholders. The trustee is authorized to
take over all the assets of Palugi Company. A statement of financial position was given
to the trustee and the following business transactions were selected.

March 31 – Sales on account, P1,050,000

April 8 – Collections of notes receivable, P75,000
May 15 – Payment of accounts payable old – P150,000

Determine the following:

a. What is the entry for the March 31 transaction in the books of SM Company?
b. What is the entry for the April 8 transaction in the books of PALUGI Company?
c. What is the entry for the May 15 transaction in the books of PALUGI Company?

12. A statement of realization and liquidation has been prepared for the LUGENA Company.
The totals are given below:
Assets to be realized 60,000
Assets realized 55,000
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ACCO 30103 – Advanced Financial Accounting and Reporting

Assets acquired 40,000

Assets not realized 30,000
Liabilities to be liquidated 80,000
Liabilities not liquidated 65,000
Liabilities assumed 50,000
Supplementary credits 110,000

Retained Earnings decreased by P12,000. The ending balance of Share Capital and
Retained Earnings are P100,000 and (P85,000) respectively.

Determine the beginning balance of cash.

13. The following data were taken from the statement of realization and liquidation of PiYuPi
Company for the quarter ended September 30, 2022:
Assets to be realized 737,500
Assets not realized ?
Assets realized 875,000
Assets acquired 880,500
Liabilities to be liquidated 1,825,000
Liabilities not liquidated 1,000,000
Liabilities assumed 770,000
Liabilities liquidated 1,595,000
Supplementary charges 620,500
Supplementary credits 845,000

The beginning balance of Share Capital and Retained Earnings are P510,000 and
P148,000 respectively. The net income for the period is P224,500.

Determine the following:

a. Assets not realized
b. Beginning balance of cash
c. Ending balance of cash

14. A statement of realization and liquidation has been prepared for LIGO Company. The
totals are given below:
Assets to be realized 60,000
Assets not realized 80,000
Assets acquired 40,000
Liabilities to be liquidated 80,000
Liabilities not liquidated 65,000
Liabilities assumed 50,000
Supplementary credits 110,000

Retained Earnings increased to P25,000. The beginning balance of Share Capital and
Retained Earnings are P120,000 and (P35,000) respectively.

Determine the following:

a. Beginning balance of cash
b. Ending balance of cash