Chapter 6

Problem I
1. Statement of Affairs - Formal
MINER
COMPANY
Statement of
Affairs
May 31,
2012
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Book
Value

Equities
Liabilities Having Priority:

P 6,000
2,400

60,000
1,600

10,000

170,000
10,000

110,000
( 50,000)
P 320,000

Accrued Wages
Taxes Payable
Fully Secured Creditors:
Notes Payable
Accrued Interest Payable
Partially Secured Creditors:
Note Payable
Equipment
Unsecured Creditors:
Accounts Payable
Notes Payable
Stockholders Equity
Common Stock
Retained Earnings (Deficit)

2. Deficiency Statement to determine estimated deficiency to unsecured creditors:

Deficiency Account
May 31, 2012
Est Estimated
im
Gains:
ate
d
Los
ses
:
A
P
C
cco 11, om
P
unt
00 mo
11
s
0 n
0,0
Rec
Sto
00
eiv
ck
abl
e
N 10,
R (50
ote
40 eta
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s
0 ine
0)
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d
eiv
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abl
nin
e
gs

In
ve
nto
ry

30,
00
0

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uil
din
gs

44,
00
0

E
qui
pm
ent
Pr
ep
aid
Ins
ura
nce
G
oo
dwi
ll

9,0
00

Es
tim
ate
d
De
fici
enc
y
to
Un
sec
ure
d
Cre
dit
ors

53,
60
0

70
0

8,5
00

P1
P
13,
11
60
3,6
0
00
Estimated final dividend rate to unsecured creditors is: P132,200/P185,800 = 71.15%

Problem II
1. Formal
Down Dog Corporation
Statement of Affairs
June 30, 2014

Book Value

Assets
Pledged with partially secured creditors
P165,000
Equipment-net
(78,000)
Less: Note payable and accrued interest
(96,000)
Unsecured amount (See below)
(9,000)
Free Assets
3,000 Cash

3,000

Deficiency
Account
Realizable Value (Loss/Gain)
P87,000
P

72,000 Accounts receivable-net

48,000
60,000 Inventories
72,000
Total net realizable value
123,000
Less: Priority liabilities wages payable
(45,000)
Total available for unsecured creditors
78,000
______ Estimated deficiency to unsecured creditors 30,000
P300,000
(90,000)

(24,000)
12,000

______
P108,000

Unsecured
Book Value

Equities

Liabilities

Priority liabilities
P 45,000
Wages payable (assumed under
P4,650 per employee)
P 45,000
Partially secured creditors
96,000 Note payable and accrued interest
Less: Equipment pledged as security

P 96,000
(87,000)

Unsecured creditors
72,000 Accounts payable
27,000 Rent payable
Stockholders equity
180,000
180,000
(120,000)
(120,000)
P300,000

P 9,000

72,000
27,000

Capital stock
Retained earnings (deficit)

______
P108,000 P

60,000
Estimated Deficiency

P(30,000)

2. Estimated payments per dollar for unsecured creditors

Cash available
Distribution to partially secured and unsecured priority creditors:
Note payable and interest
P87,000
Administrative expenses
24,000
Wages payable
45,000
Available to unsecured nonpriority creditors
Note payable and interest (unsecured portion)
Accounts payable
Rent payable
Unsecured nonpriority claims

P210,000

(156,000)
P 54,000
P 9,000
72,000
27,000
P108,000

(P54,000 / P108,000 = P0.50 per peso)

Expected recovery for each class of claims
Partially secured
Note payable and interest
Secured portion
Unsecured portion (P9,000 0.50)

P87,000
4,500

P91,500

Unsecured priority
Administrative expenses
Wages payable

P24,000
45,000

69,000

Unsecured nonpriority
Accounts payable (P72,000 0.50
Rent payable (P27,000 0.50)
Total payments

P36,000
13,500

49,500
P210,000

Problem III
Realizable value of all assets (P635,000 + P300,000 + P340,000)P1,275,000
Allocated to:
Fully secured creditors
(316,000)
Partially secured creditors
(300,000)
Unsecured creditors with priority
(100,000)
Remainder available to general unsecured creditors
P559,000
Payment rate to general unsecured creditors
(Including balance due to partially secured creditors)
P559,000 / (P1,165,000 + (P400,000 - P300,000))
Realizable value of assets:
Assets pledged to fully secured creditors
Assets pledged to partially secured creditors
Free assets
Total realizable value

44.2%
P635,000
300,000
340,000
P1,275,000

Amounts to be paid to:

Fully secured creditors
P316,000
Partially secured creditors [P300,000 + (0.442 P100,000)]344,200
Unsecured creditors with priority
100,000
General unsecured creditors (0.442 P1,165,000)
514,800*
Total
P1,275,000
*Rounded P130
Problem IV
Free Assets:
Current Assets ..........................................................
P 35,000
Buildings and Equipment ..........................................
110,000
Total
..................................................................P145,000
Liabilities with Priority:
Administrative Expenses ..........................................
P 20,000
Salaries Payable (only P3,000 per employee)...........
6,000
Income Taxes ............................................................
8,000
Total
..................................................................P 34,000
Free Assets After Payment of Liabilities with Priority
(P145,000 P34,000) ..............................................

P111,000

Unsecured Liabilities
Notes Payable (in excess of value of security) .........
P 30,000
Accounts Payable .....................................................
85,000
Bonds Payable ..........................................................
70,000
Total
..................................................................P185,000

Percentage of Unsecured Liabilities To Be Paid: P111,000/P185,000 = 60 %

Payment On Notes Payable:
Value of Security (land) ............................................
P 90,000
60% of Remaining P30,000 ......................................
18,000
Total Collected by holders ........................................
P108,000
Problem V

Free Assets:
Cash
..................................................................P30,000
Receivables (30 percent collectible)...............................
15,000
Inventory
39,000
Land (value in excess of secured note:
P120,000 P110,000)....................................................
10,000
Total
P94,000
Less: Liabilities with priority
Salary payable (below maximum)..................................
Free assets available......................................................
Unsecured Liabilities:
Accounts payable...........................................................
Bonds payable (less secured interest in
building: P300,000 P180,000)......................................
Unsecured liabilities.......................................................

(10,000)
P84,000
P90,000
120,000
P210,000

Percentage of unsecured liabilities to be paid: P84,000/P210,000 = 40%

Amounts to be paid for:
Salary payable (liability with priority to be paid
in full)
P10,000
Accounts payable (unsecuredwill collect 40%
of debts of P90,000).......................................................
Note payable (fully secured by landwill collect
entire balance)..............................................................
Bonds payable (partially securedwill collect
P180,000 from building and 40 percent of the
remaining P120,000)......................................................

P36,000
P110,000
P228,000

Problem VI
Class of Creditors
Fully secured liabilities
Partially secured liabilities
Unsecured liabilities with priority
Unsecured liabilities without priority

Total Creditors Claims

183,600
54,600
30,810
182,500

Problem VII
1. Total estimated proceeds
Less asset proceeds claimed by secured
creditors:

Tota

Notes payable and interest (from

proceeds of receivables and inventory)
Mortgage payable and interest (from
proceeds of land and building)
Total available to unsecured claimants.
Less distributions to unsecured claims
with priority:
Wages payable
Taxes payable
Amount available for unsecured claims
2.

Unsecured portion of notes payable and

interest (P500,000 + P30,000 P150,000)
Accounts payable
Total claims ofunsecured creditors
Dividend to Unsecured Creditors
P410,000 P640,000 = 64.1%

3.

Unsecured portion of notes payable and

Interest
Dividend on unsecured amount
Amount received on unsecured portion
Proceeds from receivables and inventory
Total Received
Dividend to note holders: P393,580 P530,000 = 74.3%

Problem VIII
1.
WILBUR
CORPORATION
STATEMENT OF
AFFAIRS
DECEMBER 31,
20x4
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2. Percentage to unsecured creditors: P131,000/P176,000 = 74.43%

Problem IX
Smith Company
Statement of Realization and Liquidation
Assets
Assets to be realized
Assets Realized
Old Receivebles, net
P 50,000
Marketable Securities
20,000
Old
Inventory
72,000
Depreciable Assets,
net
120,000

Old
Receivbles
P 28,000
New
Receivbles
65,000
Marketable Securities
15,000
Sales of Inventory
100,000

Assets Acquired

Assets Not Realized

New
Receivables
100,000

Old Receivables, net

22,000
New Receivables, net
35,000
Depreciable Assets
96,000

Supplementary Items
Supplementary
Supplementary
Charges
Credits
Old Current Payables
P 31,000

Net
P 7,000

Liabilities
Liabilities Liquidated
Liabilities
Liquidated
Old Current Payables
P 31,000
Liabilities
Liquidated

Not

Old Current Payables

P 34,000
P433,000

Problem X

Loss

to

be

Old Current Payables

P 65,000
Liabilities Incurred

________
P 433,000

Mallory Corporation
Statement of Realization
Forand
the Liquidation
Three Months
Ended July 31,
20x5
Assets
Assets
Cash
NonCash
Beginni
P P720,0
ng
4,000
00
Cash
Receipt
Coll 60,000 (70,000
ection
Sale 170,00 (200,00)
of Sale 20,000
0 (340,00
0)
of land
0)
Sale 70,000 (100,00
of
0)
Cash
Disburs
Pay (60,000
ment
of (170,00)
Parti
al Parti (70,000
0)
al
Ending
P24,00) P10,00
balance
0
0
Liabilities
Unsecure
d
With
Priority
P94,000

Fully
Partially
Without
Owner's
Assets
Secured
Secured
Priority
Equity
Beginning P240,000 P270,000
P0
P120,000
balances
Cash
Receipts:
(10,000)
Sale of
(30,000)
inventory
Sale of (240,000)
(80,000)
land
andof
Sale
(30,000)
machiner
Cash
Disburse
(60,000)
Partial
(180,000)
10,000
payment
Partial ________
(90,000) ________
20,000
________
payment
Ending
P
0 P
0
P34,000
P30,000
P
balance
P
0
(30,000)
Multiple Choice Problems
1. d since there is parent and subsidiary relationship, any intercompany accounts are
eliminated from consolidated point of view.
2.

a - [P90,000 + P36,000 + P10,000 P45,000 = P91,000 total estimated amount

available; P91,000 (P4,500 + P10,000) = P76,500 estimated amount available for
unsecured, non-priority creditors; P76,500 P90,000 = 0.85]

3. c it is a partially secured liability

4. d [(P1,110,000 P780,000) + P960,000] P210,000 = P1,080,000
5. b P25,000 + [.30 x (P75,000 P25,000)] = P40,000
6. d (P555,000 P390,000) + P480,000 = P645,000 P105,000 = P540,000
7. b P30,000 + [.30 x (P90,000 P30,000)] = P48,000

8. c [ P110,000 + (P150,000 P110,000) x 40%] = P128,000

9. d
10. c P60,000 + [(P120,000 + P6,000) (P30,000 + P35,000) = P121,000
11. b - P20,000 + P80,000 + [P170,000 (P150,000 + P7,000)] = P113,000 (P10,000 +
P10,000)
= P93,000
12. c P93,000/P121,000 = 77% rounded.
13. a
Net Free Assets:
(P700,000 P300,000) + P70,000 + P230,000 = P700,000 P140,000 = P560,000
Total Unsecured Creditors without priority:
(P400,000 P300,000) + P600,000 = P700,000
14. c - Pension P10,000 + Salaries P35,000 (= P10,600 + P10,950 + P10,950 + P2,500) +
Taxes P80,000 + Liq. expenses P40,000 = P165,000.
15. c
Statement of Realization and Liquidation
Assets to be Realized.
Assets Acquired..
Liabilities Liquidated.
Liabilities Not Liquidated.
Supplementary charges/
debits

P 1,375,000
750,000
1,875,000
1,700,000

Assets Realized..P 1,200,000

Assets Not Realized 1,375,000
Liabilities to be Liquidated.
2,250,000
Liabilities Assumed..
1,625,000
Supplementary credits
2,800,000

3,125,000
P 8,825,000

P 9,250,000

Net Gain.. P 425,000

16. No requirement
17. c
Total Liabilities (refer to Liabilities not liquidatedNo. 14) P1,700,000
+: Stockholders Equity (P1,500,000 P500,000) 1,000,000
Total LSHE = Total Assets P 2,700,000
-: Noncash assets (refer to Assets not realized-No. 14). 1,375,000
Cash balance, endingP1,325,000
18. P440,000
Total Free Assets:
Fully secured:
Land and building: P650,000 (P300,000 + P20,000) = P 330,000
Free assets:

Cash
Equipment

10,000
100,000

440,000

Or,
Total estimated proceeds
Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory)
Mortgage payable and interest (from
proceeds of land and building)
Total available to unsecured claimants/total free
19. P410,000
Total available to unsecured claimants/total free
Less distributions to unsecured claims
with priority:
Wages payable
Taxes payable
Amount available for unsecured
claims/net free assets
20. P640,000 = P260,000 + [(P50,000 + P100,000) (P500,000 + 30,000), or
Unsecured portion of notes payable and
interest (P500,000 + P30,000 P150,000)
Accounts payable
Total claims of unsecured creditors

21. 64.1%
Dividend to unsecured creditors
P410,000 P640,000 = 64.1%
22. P320,000 = P300,000 + P20,000
23. P393,580
Unsecured portion of notes payable and
interest
Dividend on unsecured amount
Amount received on unsecured portion
Proceeds from receivables and inventory
Total Received
Dividend to note holders: P393,580 P530,000 = 74.3%
24. P30,000
25. P166,666 = P260,000 x 64.1
26. P910,247 = P320,000 + P393,580 + P30,000 + P166,666 (discrepancy of P247 due to
rounding-off)
27. P230,000
Net free assets (No. 19)
P410,000

Less: Unsecured creditors without priority (No. 20)

640,000
P230,000

28. P340,000 = P910,000 P1,250,000

29. P340,000, same with No. 28, since there are no unrecorded expenses liabilities)
30. P60,675 you may the same procedure in Nos. 18 to 29 to solve this problem, the
following is the formal presentation of statement of affairs

Estimated Net Realizable

Value
Book
Value Assets
Assets pledged with fully secured creditors:
98,500
Land and Bldg
5,800
Investment in Calandir
Total
Assets pledged with partially secured
creditors:
41,000
Inventory
43,000
Equipment
Free Assets:
1,850
Cash
21,200
Accounts Rec
15,000
Note Rec
Estimated Amount Avail for unsecured creditors with and without priority
Less unsecured creditors with priority
Estimated amounts for unsecured creditors without priority (Net Free Assets):
Net Realizable Amount Avail
_______
Deficiency
226,350

Book Liabilities
Value and Owners Equity
Fully Secured Creditors:
600
Accrued Mtg Interest
70,000
Mortgage Payable
375
Accrued N/P Interest
10,000
Note Payable
Total
Partially Secured
Creditors:
50,000
Accounts Payable
Unsecured Creditors with
Priority:
3,775
Accrued Payroll
Unsecured creditors without
Priority:
40,625
Accounts Payable

92,800
15,000
107,800

20,000
8,000
1,850
17,000
15,000

_______
169,650

Estimated
Secured
Amount
600
70,000
375
10,000
80,975

28,000

10,00
0
185,375
40,975
226,350

31.
32.
33.
34.
35.
36.
37.

Other Accrued Liabilities

_______

Totals
Owner Equity

108,975

P56,900 refer to No. 30 for computation

P72,625 refer to No. for computation
Dividend - P56,900/P72,625 = P.78 refer to No. 30 for further computation
P80,975 refer to No. 30 for computation
P45,160 = P28,000 + (P22,000 x 78%)
P3,775
P39,487.50 = 78% x (P40,625 + P10,000)

38. P169,397.50
No. 34..P 80.975
No. 35.. 45,160
No. 36..
3,775
No. 37.. 39,487.50
P169,397.50 (discrepancy around P250 plus due to rounding-off)
39. P15,725 refer to No. 30 or P56,700, estimated net loss P40,975, owners equity
40. P56,700 refer to No. 30 or P169,650 P226,350
41. P56,700 (same with No. 40 since there are no unrecorded expenses liabilities)
42. P22,475
Liabilities
Assets
6/1/x5 Balances:

Cash Receipts:
Securities Sale
N/R Collected
Equipment Sale
Inventory Sale
Cash Disbursements:
Bank Loan
Part Pyt-A/P
6/30 Balance

43.
44.
45.
46.
47.
48.

P119,700 refer to No. 42

P70,600 refer to No. 42
None refer to No. 42
P3,775 refer to No. 42
P71,625 refer to No. 42
(P3,825) deficit refer to No. 42

Cash

Fully
Noncash

Partial
Secured

1,850

224,500

80,975

16,000
15,000
7,000
22,000
(10,375)
(29,000)
22,475

(5,800)
(15,000)
(43,000)
(41,000)

---------119,700

(10,375)
--------70,600

49.
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P2,000
professional fee.

50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.

P124,000 refer to No. 49

P150,000
82.67% = P124,000/P150,000
P105,000
None
P26,900
P124,005 = P150,000 x 82.67%
P255,900 = P72,000 + P26,900 + P124,005 (discrepancy of P5)
P26,000 = (P72,000 + P2,000 unrecorded ) P48,000 or P150,000 P124,000
P72,000 refer to No. 49
P74,000 = P72,000, loss of realization of assets + P2,000 unrecorded expenses

THEORIES

1.
debtor
2. P5,000
3.
inability to pay debts as they mature
4.
a.
administrative costs
b.
certain postfiling gap claims in involuntary filings
c.
wages, salaries, and commissions
d.
employee benefit plans
e.
deposits by individuals
f.
taxes
5.
infrequent
6.
two-thirds, more than one-half
7.
fraudulent, preferential
8.
realization and liquidation
9.

False
False
False
True
False

10.
11.
12.
13.

14.

15.
16.
17.
18.

44.

45.
46.
47.
48.

a
c
c
a
b

False
True
True
True
True
49.

c
50. d
51. a
52. d
53. b