CORPORATE LIQUIDATION

CORPORATE LIQUIDATION
A corporate is considered insolvent when it is unable to pay its debts as they come due, or when its total debts
exceed the fair value of its assets. The inability to make payments in due course is referred to as equity insolvency,
whereas, having total debts that exceed the fair value of total assets is referred to as bankruptcy insolvency. Debtor
Corporation that are insolvent in the equity sense may be able to avoid bankruptcy proceedings by negotiating an
agreement directly with creditors which we call debt restructuring, whereas, Debtor Corporation that are insolvent in
the bankruptcy sense will ordinarily be reorganized or liquidated under the supervision of a bankruptcy court.
STATEMENT OF AFFAIRS
An accounting statement that provides relevant information for a liquidating company is referred as the statement of
affairs. This statement is a legal document prepared for the bankruptcy court. The accounts statement of affairs is a
financial statement that emphasizes liquidation values and provides relevant information for the trustee in
liquidating the debtor corporation. It also provides information that may be useful to creditors and to the bankruptcy
court. A statement of affairs is prepared as of a specific date, and is shows balance sheet information with assets
measured at expected net realizable values and classified on the basis of availability for fully secured, partially
secured, priority, and unsecured creditors. Liabilities are classified in the statement of affairs as priority, fully
secured, partially secured, and unsecured. Historical cost valuations are also included in the statement for
reference purposes.
EXAMPLE:
The following information was taken from the Statement of Affairs file by UNLUCKY Corporation to the bankruptcy
court on July 1, 2014.
UNLUCKY Corporation
Statement of Affairs
July 1, 2014
Book value

P200, 000

175, 000

15, 000
10, 000
100, 000
10, 000
60, 000
5, 000

Assets

Realizable ValuesLiability Offsets for

Secured Creditors

Pledge for Fully Secured Creditors

Land and building net
Less: Mortgage payable
Interest payable

P200, 000
5, 000

Pledge for Partially Secured Creditors

Accounts receivable
Less: Notes payable to bank
Interest payable

P120, 000
10, 000

Realizable Values
Available for
Unsecured Creditor

P220, 000
205, 000

P15, 000

P100, 000
130, 000

Available for Priority and Unsecured Creditors

Cash
Marketable securities
Inventories
Prepaid expenses
Equipment net
Intangible assets
Total available for priority and unsecured
Creditors
Less: Priority liabilities
Total available for unsecured creditors
Estimated deficiency

0
15, 000
19, 000
75, 880
---25, 000
--149, 880
72, 000
77, 880
158, 120
P236, 000

575, 000
Liabilities and Shareholders Equity
Book Value
Claims

Secured and
Priority Claims

P 75, 000
15, 000

Priority Liabilities
Wages payable
Property taxes payable

200, 000
5, 000

Fully Secured Creditors

Mortgage payable
Interest payable

P 60, 000
12, 000
P 72, 000

200, 000
5, 000
P205, 000

Unsecured
Non-priority

120, 000
10, 000

Partially Secured Creditors

Notes payable bank
Interest payable
Less: Accounts receivable pledge

116, 000
90, 000
200, 000
(255, 000)
P575, 000

120, 000
10, 000
P130, 000
100, 000

P30, 000

Unsecured Creditors
Accounts payable
Notes payable to suppliers

116, 000
90, 000

Stockholders Equity
Capital stock
Retained earnings
P236, 000

REQUIRED:
1. Determine the estimated amount payable per peso of unsecured non-priority liability.
2. Show how much each of the creditors would receive after liquidation.
STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS
This statement shows the beginning balance of cash, the variable sources of cash, example, collections of
accounts, sales of assets and refund of prepaid items and also shows the various uses of cash, example the
payment of various expenses and liabilities. All disbursements require the approval of the court, so the statement
should be a useful financial summary. An example is shown below:
UNLUCKY Corporation in Trusteeship
Statement of Cash Receipts and Disbursements
From JULY1-31, 2014
Cash balance, July 1, 2014
Add: Cash receipts
Sale of inventory items
Sale of equipment
Sale of land and building
Collection of receivables
Dale of Marketable Securities
Total cash receipts
Deduct: Cash disbursements
Wages payable (priority claim)
Property taxes payable (priority claim)
Mortgage payable and interest (fully secured)
Bank note payable and interest (for secured portion)

P15, 000
P75, 880
25, 000
220, 000
100, 000
19, 000
439, 880
454, 880
P60, 000
12, 000
205, 000
100, 000

Total cash disbursements

Cash balance, July 31, 2014

377, 000
P77, 800

STATEMENT OF REALIZATION AND LIQUIDATION

This statement is an activity statement that is intended to show progress toward the liquidation of a debtors estate.
its original purpose is to inform the bankruptcy court and interest creditors of the accomplishments of the trustee.
EXAMPLE:
Below is a statement of realization and liquidation of HOPELESS MART COMPANY which is under receivership, for
the month ended July 31, 2014
HOPELESS MART SALES COMPANY
BDO Receiver
Statement of Realization and Liquidation
For the Month Ended July 31, 2014
Assets
Assets to be realized:
Marketable securities
Accounts receivable
Merchandise
Assets acquired:
Accounts receivable

P16, 000
38, 000
20, 000
10, 000

Assets realized:
Marketable securities
Accounts receivable
Assets not realized:
Accounts receivable
Merchandise

P12, 000
30, 000
5, 000
15, 000

Liabilities
Liabilities liquidated:
Accounts payable
Liabilities not liquidated:
Accounts payable
Accrued expenses

28, 000
10, 000
2, 000

Profit and Loss

Supplementary charges:
Purchases
Payment of expenses of
Receivership

1, 500
7, 500

Liabilities to be liquidated:
Accounts payable
Liabilities assumed:
Accounts payable

45, 000
8, 000

Supplementary charges:
Sales on account
Interest on marketable securities
Sales for cash

6, 000
2, 000
20, 000

REQUIRED:
Determine the net income or loss for the period:
ANSWER:
ASSETS:

Total Assets to be realized

Total assets acquired

P74, 000
10, 000

P84, 000

Total assets realized

Total assets not realized

P42, 000
20, 000

62, 000

LIABILITIES: Total liabilities to liquidated

Total liabilities assumed

P45, 000
8, 000

53, 000

28, 000
12, 000

40, 000

Total liabilities liquidated

Total liabilities not liquidated
PROFIT AND LOSS:
Supplementary Credits
Supplementary Debits

P28, 000
12, 000

22, 000- Loss

13, 000- Gain

16, 000- Gain

P7, 000- INCOME

PROBLEMS
1. The following information was taken from the Statement of affairs filed by LIQUIDATED Corporation to the
bankruptcy court on July 31, 2014:

LIQUIDATED Corporation
Statement of Affairs
July 31, 2014
Book value

P750, 000

375, 000

10, 800
150, 000
220, 000
2, 200

1, 508, 000

Assets

Realizable ValuesLiability Offsets for

Secured Creditors

Pledge for Fully Secured Creditors

Machineries and Equipment net
Less: Mortgage payable
P500, 000
Interest payable
50, 000
Pledge for Priority and Secured Creditors
Merchandise Inventory
Less: Notes payable to bank
P 300, 000
Interest payable
30, 000
Available for Priority and Unsecured Creditors
Cash
Accounts Receivable
Land
Intangible assets
Total available for priority and unsecured
Creditors
Less: Priority liabilities
Total available for unsecured creditors
Estimated deficiency

Realizable values
Available for
Unsecured Creditors

P600, 000
550, 000

P50, 000

P290, 000
330, 000

0
10, 800
91, 200
250, 000
---402, 000
132, 250
269, 750
145, 250
P415, 000

Liabilities and Shareholders Equity

Book values
Claims
P 65, 500
58, 000
8, 750

Secured and
Unsecured
Priority Claims Non-priority
Priority Liabilities
Wages payable
Property taxes payable
Administrative Expenses Payable

500, 000
50, 000

Fully Secured Creditors

Mortgage payable
Interest payable

300, 000
30, 000

Partially Secured Creditors

Notes payable bank
Interest payable
Less: Accounts receivable pledge

210, 000
165, 000

P 65, 500
58, 000
8, 750
P 132, 250
500, 000
50, 000
P 80, 000
300, 000
30, 000
P 330, 000
290, 000

Unsecured Creditors
Accounts payable
Notes payable to suppliers

P40, 000
210, 000
165, 000

Stockholders Equity
450, 000
Capital stock
(329, 250)
Retained earnings
P1, 308, 000
1. How much each of the creditors would receive after liquidation?
Fully Secured
Partially Secured
Priority Creditors
A. P550, 000
P290, 000
P132, 250
B. 500, 000
316, 000
132, 250
C. 550, 000
316, 000
132, 250
D. 500, 000
290, 000
132, 250

P 415, 000
Non-Priority Creditors
P243, 750
263, 500
243, 750
263, 500

The balance sheet of 1680 MARKETING Corporation at August 31, 2014 contains the following items:
Assets
Cash
Accounts receivable net
Inventories
Land
Building net
Machinery net
Goodwill
Equities
Accounts payable
Wages payable
Property taxes payable
Mortgage payable
Interest on mortgage payable
Note payable unsecured
Interest payable unsecured
Capital stock
Retained earnings (deficit)

P 400, 000
700, 000
500, 000
300, 000
2, 000, 000
600, 000
500, 000
P 5, 000, 000
P1, 100, 000
600, 000
100, 000
1, 500, 000
150, 000
500, 000
50, 000
2, 000, 000
(1, 000, 000)
P 5, 000, 000

The company is in financial difficult and its stockholders and creditors have requested a statement of affairs for
planning purposes. The following information is available:
The company estimates that P370, 000 is the maximum amount collectible for the accounts receivable.
Except for 20% of the inventory items that are damaged and worth only P20, 000, the cost of other items is
expected to be recovered in full.
The land and building have a combined appraisal value of P1, 700, 000 and are subject to the P1, 500, 000
mortgage and related accrued interest.
The appraised value of the machinery is P120, 000.
Wages payable and property taxes payable are unsecured priority items that do not exceed any limitation
of the Bankruptcy Act.
2. How much is the estimated settlement per peso of unsecured liabilities?
A. P0. 75
B. P0.40
C. P0.50
D. P0.75

WIRELESS Inc. is undergoing liquidation since January 1, 2014. Its condensed statement of realization
and liquidation as of June 30, 2014 show:
Supplementary Charges
Assets Acquired
Liabilities not liquidated
Assets Realized
Assets to be realized

P415, 200
110, 000
308, 200
620, 000
725, 000

Liabilities Assumed
Assets Not Realized
Supplementary Credits
Liabilities Liquidated
Liabilities to be Liquidated

How much is the net income (loss) for the period ending June 30, 2011?
A. P72, 450
B. P54, 300
C. P26, 450

P425, 000
192, 000
410, 350
912, 500
850, 000

D. P385, 700

3. The CASHLESS COMPANY has the following:

Unsecured creditors
P230, 000
Liabilities with priority
110, 000
Secured liabilities:
Debt one, P210, 000; value of pledge asset
180, 000
Debt two, P170, 000; value of pledge asset
100, 000
Debt three, P120, 000; value of pledge asset
140, 000
The company also has a number of other assets that are not pledge in any way. The creditors holding debt two
want to receive at least P142, 000. For how much do these free assets have to be sold so that debt two would
receive exactly P142, 000?
A. P138, 000
B. P228, 000
C. P288, 000
D. P258, 000
PAYLESS Corporation filed a petition of bankruptcy on January 2011. On March 15, 2011 the trustee provided the
following information about the corporations financial affairs.
Book values

Estimated
Realizable
Values

Assets
Cash
Accounts receivable, net
Inventories
Plant assets net
Total

200, 000
1, 000, 000
1, 500, 000
2, 500, 000
P 5, 200, 000

P 200, 000
750, 000
750, 000
2, 800, 000

Liabilities
Liability for priority claims
P 500, 000
Accounts payable unsecured
1, 500, 000
Note payable, secured by accounts receivable
1, 000, 000
Mortgage payable, secured by all plant assets
2, 200, 000
Total
P 5, 200, 000
4. Determine the amount expected to be available for unsecured claims.
A. P1, 500, 000
B. P900, 000
C. P800, 000
D. P1, 050, 000
5. Determine the expected recovery per peso of unsecured claims.
A. P0.60
B. P0.5720
C. P0.70

D. P0.6350

6. The amount of recovery to unsecured accounts payable.

A. P855, 000
B. P900, 000
C. P1, 290, 000

D. P600, 000

ENRON Company filed a voluntary bankruptcy petition on July 1, 2011 and the statement of affairs reflects the
following amounts:

Assets pledge with fully secure creditors

Assets pledge with partially secured creditors
Free Assets
Liability with priority
Fully secured creditors
Partially secured creditors
Unsecured creditors

BOOK
CARRYING
VALUE
P150, 000
90, 000
210, 000
P 450, 000
Liabilities
P35, 000
130, 000
90, 000
270, 000
P 525, 000

ESTIMATED
CURRENT
VALUE
P185, 000
60, 000
160, 000
P 405, 000

3. Determine the amount to be received by partially secured creditors.

A.
P90, 000
B. P78, 000
C. P60, 000

D. P72, 000

4. Assume that the assets are converted into cash at the estimated current value and the business is
liquidated. How much cash will be available to pay the unsecured non-priority claims?
A. P240, 000
B. P180, 000
C. P160, 000
D. P125, 000
The information below is related to GREEK Corporation, which is in bankruptcy liquidation as of July 31, 2011:
a. Assets which there are no claims amount to P100, 000.
b. Unsecured claims of all classes. P150, 000.
c. Some of the details of the claims outstanding are as follows:
An unrecorded note for P20, 000 with P600 accrued interest.
Unpaid salaries of employees. P16, 930.
A note amounting to P40, 000 inclusive of P4, 000 interest, secured by P50, 000 receivable, estimated
to be 60% collectible.
A P250, 000 note secured by a property with a book value of P250, 000 and market value of P280,
000.
Property taxes and income taxes payable of P30, 000.
5. Compute the estimated payment to partially secured creditors.
A. P83, 070
B. P31, 800
C. P34, 600

D. P35, 422

WANTED Corporation filed bankruptcy on July 1, 2011 and some of the information below were taken from its
statement of affairs.
Estimated
Book Value
Realizable Value
Assets:
Assets pledge with fully secured creditors
P250, 000
P300, 000
Assets pledge with partially secured creditors
180, 000
120, 000
Liabilities:
Fully secured creditors
Partially secured creditors
Unsecured creditors with priority
Unsecured creditors

P280, 000
200, 000
100, 000
400, 000

6. Assumed that the assets are converted to cash at the estimated realizable values, what is the total
estimated realizable value of the free assets if the partially secured creditors received P176, 000?
A. P436, 000
B. P316, 000
C. P336, 000
D. P416, 000
APFSC - FSC
APPSC PSC
Free Assets Priority
Unsecured Creditors
Total
Deficiency

FSC
PSC
(120000 + 80000 x .70)
PRIORITY
UNSECURED (400000 x .70)
TOTAL

Assets
20000

Liabilities
80000

316000
336000
144000

400000
480000

Amount Received
280000
176000
100000
280000
836000 420000 = 416000

UNLUCKY Corporation has already prepared its statement of affairs and the following data were taken from it:
Free assets (fair value P50, 000)
P80, 000
Note Payable 1 (secured by assets with
Fair value of P75, 000)
65, 000
Note Payable 2 (secured by assets with
Fair value of P58, 000)
75, 000
Note Payable
25, 000
Accounts Payable
75, 000
Salaries Payable
4, 000

Taxes Payable

3, 000

7. How much is the estimated deficiency to unsecured creditors?

A. P44, 000
B. P34, 000
C. P64, 000
APFSC - FSC
APPSC PSC
Free Assets Priority
Unsecured Creditors
Total
Deficiency

Assets
10000

D. P37, 000

Liabilities
17000

43000
53000
64000

FSC
PSC 58000 + (17000 X 53/117)
PRIORITY
UNSECURED (100000 X 53/117)
TOTAL

100000
117000
Amount Received
65000
65701
7000
45299
183000

8. BANCO Co. has been forced into bankruptcy and liquidated. Unsecured claims will be paid at the rate of
P0.50 on the peso. CUTE Co. hold a non-interest bearing note receivable from BANCO Co. in the amount
of P50, 000 collateralized by machinery with a liquidation value of P10, 000. How much is the total amount
to be realized by CUTE Co. on this note receivable?
A. P35, 000
B. P30, 000
C. P25, 000
D. P10, 000
10000 + 40000 X .50 = 30000
9. BPI- MALABON holds a P500, 000 note secured by a building owned by LOST software, which has filed for
bankruptcy. If the property has a book value of P600, 000 and a fair market value of P450, 000, what is the
best way to describe the notes held by BPI- MALABON? The bank has
A. A secured claim of P500, 000.
B. An unsecured claim of P500, 000.
C. A secured claim of P450, 000 and an unsecured claim of P50, 000.
D. A secured claim of P50, 000 and an unsecured claim of P50, 000.

10. DEBTOR Inc. owes the CREDITOR Corporation P60, 000 on account, which is secured by accounts
receivable with a book value of P50, 000. The unsecured portion is considered a claim under the
bankruptcy law, DEBTOR has field for bankruptcy. Its statement of affairs lists the accounts receivable
securing the DEBTOR account with an estimated realizable DEBTOR expect to receive?
A. P60, 000
B. P58, 000
C. P57, 000
D. P48, 000
The following information is available concerning MONDRAGON Inc., on the date the company entered into
bankruptcy proceedings:
ACCOUNT
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Expenses
Building, net
Equipment, net
Goodwill
Wages Payable
Taxes Payable
Accounts Payable
Notes Payable
Ordinary Shares
Deficit

Balance per Books

P2, 860
52, 260
28, 000
430
59, 000
5, 600
5, 650
2, 500
1, 810
79, 000
15, 150
72, 000
16, 660

Inventories with book value of P28, 000 is a security for notes of P10, 300. The other notes are secured by the
equipment.
Expected realizable values of the assets are:
Accounts Receivable
P44, 000
Building, net
P22, 000
Inventory
18, 500
Equipment, net
2, 000
11. What is the estimated deficiency to unsecured creditors?

A. P79, 000

B. P65, 500

C. 72, 500

D. P9,100

The following data were taken from statement of affairs of GOOD EARTH Co:
Unsecured liabilities with priority
Shareholders Equity
Estimated Liquidation Expenses
Unsecured liabilities without priority
Loss on realization of assets
12. How much is the total free assets?
A. P1, 059, 625
B. P937, 125

P122, 500
441, 000
55, 125
1, 102, 500
551, 250

C. P992, 250

D. P953, 375

The following data were taken from the records of LIQUIDATED Co. who is in the process or Liquidation:
Shareholders Equity per book
Ordinary Shares
Deficit
Estimated gain on realization of land and building
Estimated loss on realization of assets:
Accounts Receivable
Inventories
Prepaid Rent
Equipment
Goodwill
Estimated claims requiring settlement:
Liquidation Expenses
Contingent Liabilities

P350, 000
54, 250
78, 750
23, 100
84, 000
2, 100
170, 000
57, 500
17, 500
26, 250

13. What is the estimated deficiency to unsecured creditors?

A. P75, 950
B. P7, 350
C. P5, 950

D. P81, 550

A trustee has appointed by SEC for SORRY Company which is being liquidated. The following transactions
occurred after the assets were transferred to the trustee:
Sales on account by the trustee were P75, 000; cost of goods sold were P60, 000 consisting of all inventory
transferred from SORRY.
The trustee sold at P12, 000 of marketable securities for P10, 500.
Receivables collected by the trustee; Old- P21, 000 of the P38, 000 transferred; new- P47, 000.
Recorded P16, 000 depreciation on the plant assets of P96, 000 transferred from SORRY.
Disbursements by the trustee;
Old current payable- P22, 000 of the P48, 000 transferred; Trustees Expenses- P4, 300.
In the statement of realization and liquidation:
14. How much are the total assets to realized?
A. P168, 000
B. P140, 000
C. P218, 000
D. P206, 000
15. How much is the proceeds from the total assets realized?
A. P132, 500
B. P150, 500
C. P153, 500

D. P143, 000

16. How much is the net gain (loss) from realization?

A. P (8, 600)
B. P(11, 100)
C. P(2, 200)

D. P(6, 800)

17. A receiver is appointed for X-MEN 3 Corporation July 1, at which time the following trial balance was
prepared from the general ledger:
Trial Balance
Cash
Notes receivable
Accounts receivable
Merchandise inventory
Investments, cost
Plant and equipment
Accumulated depreciation
Notes payable
Accounts payable

P 33, 000
57, 000
219, 000
145, 500
30, 000
520, 000
P 85, 000
105, 000
480, 000

Capital stock, par value P20

Retained earnings

150, 000
184, 500
P 1, 004, 500 P 1, 004, 500

Additional data:
a. Accrued expenses not recorded as of this date, amount to P10, 050 of which P3, 300 is for property taxes
and P3, 600 is for wages for the past month.
b. The investments have a market value of P34, 500 and have been pledge as collateral on a note for P30,
000.
c. Accounts receivable of P90, 000 have been assigned as security for the remainder of the notes payable.
d. It is estimated that 95% of the note receivable, 95% of the assigned accounts receivables and 75% of the
remaining accounts receivable will be collected.
e. A quick sale of the inventory will realize P90, 000 and of the plant, P165, 000. The corporation also owns a
patent not recorded on the books which is expected to realize
P6, 000.
How much is the estimated deficiency to unsecured creditors?
A. P30, 150
B. P25, 300
C. P28, 000
D. P32, 900

END