ACCOUNTING FOR SPECIAL

TRANSACTIONS
(Advanced Accounting 1)

LECTURE AID

2021

ZEUS VERNON B. MILLAN

Chapter 5
Corporate Liquidation and Reorganization
 

Learning Objectives

• Describe the accounting for non-going

concern entities.

ACCOUNTING FOR SPECIAL

TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
Corporate liquidation

• Liquidation – is the termination of business operations

or the winding up of affairs. It is a process by which
1. The assets of the business are converted into cash,
2. The liabilities of the business are settled, and
3. Any remaining amount is distributed to the owners.

ACCOUNTING FOR SPECIAL

TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
Measurement basis

• For entities undergoing liquidation, the appropriate

measurement basis is realizable value.
 For assets, realizable value is estimated selling price less
estimated costs to sell.
 For liabilities, realizable value is the expected net settlement
amount.

ACCOUNTING FOR SPECIAL

TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
Financial reports

• Liquidating entities usually prepare the following classes

of financial reports:
1. Statement of affairs
2. Statement of realization and liquidation

ACCOUNTING FOR SPECIAL

TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
Statement of affairs
• Assets in the statement of affairs are classified into the following:
1. Assets pledged to fully secured creditors – these are assets with realizable
values equal to or greater than the realizable values of the related liabilities
for which these assets have been pledged as security.
 
2. Assets pledged to partially secured creditors – these are assets with
realizable values less than the realizable values of the related liabilities for
which these assets have been pledged as security.

3. Free assets – these are assets that have not been pledged as security of
liabilities. These also include the excess of realizable values of assets pledged to
fully secured creditors over the realizable values of related liabilities for which
these assets have been pledged.
ACCOUNTING FOR SPECIAL
TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
 Statement of affairs (Continuation)
• Liabilities in the statement of affairs are classified into the following:
1. Unsecured liabilities with priority – these are liabilities that, although not
secured by any asset, are mandated by law to be paid first before any other
unsecured liabilities. These liabilities include the following: Administrative
expenses, Unpaid employee salaries and other benefits and Taxes and
assessments
2. Fully secured creditors – these are liabilities secured by assets with
realizable values equal to or greater than the realizable values of such
liabilities.
3. Partially secured creditors – these are liabilities secured by assets with
realizable values less than the realizable values of such liabilities. 
4. Unsecured liabilities without priority – all other liabilities not classifiable
under (1), (2) or (3) above.
ACCOUNTING FOR SPECIAL
TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
 END
ACCOUNTING FOR SPECIAL TRANSACTIONS (Advanced Accounting 1) - (by:
MILLAN)