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Creditors (P116,000 P70,000) __46,000
Total P126,000

Liabilities with priority P 42,000

Free assets after payment of liabilities with priority
(P126,000 P42,000) P 84,000
Unsecured liabilities:
Excess of partially secured liabilities over pledge
Assets (P130,000 P50,000) P 80,000
Unsecured creditors _200,000
Total P280,000

Recovery percentage: P84,000 / P280,000 = 30%

Payment of partially secured debt:

Value of pledged assets P 50,000
30% of remaining P80,000 __24,000
Total collected P 74,000

122 Chapter 7
 7-8: a
The holder of Debt Two will receive P100,000 from the sale of the pledged asset. Since the holder
wants to receive P142,000 out of the total debt of P170,000, the company must be able to
generate enough cash to pay off 60% of the unsecured liabilities (P42,000/P70,000) after paying
100% of the liabilities with priority (P110,000).

Unsecured liabilities:
Unsecured creditors P230,000
Excess liability of Debt One in excess of pledged
Asset (P210,000 P180,000) 30,000
Excess liability of Debt Two in excess of pledged
Asset (P170,000 P100,000) __70,000
Total unsecured liabilities P330,000
Necessary percentage ____60%
Cash needed for these liabilities P198,000

In order for the holder of Debt Two to received exactly P142,000, the other free assets must be
sold for P308,000. With that much money, the liabilities with priority (P110,000) can be paid with
the remaining P198,000 going to the unsecured debts of P330,000. This 60% figure would insure
that the holder of Debt Two would get P100,000 from the pledged asset and P42,000 (P70,000 x
60%) from the free assets.

7-9: c
Estate equity, beg. (P100,000 P85,000) P 15,000
Loss on realization (P100,000 P75,000) ( 25,000)
Unrecorded liabilities:
Interest expense P 250
Administrative expense 4,000 ( 4,250)-
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Less: Unsecured liabilities with priority (1,850 + 4,650) ___6,500
Net Free Assets P 71,410
Divide by Unsecured creditors:
Balance of Partially Secured Creditor
Notes Payable - PNB P 15,000
Notes Receivable __12,500 2,500
Accounts Payable 52,500
Notes Payable__51,250 103,750 P106,250
Estimated recovery % 67%

7-22: d
Fully secured (Notes Payable) P 90,000
Partially secured:
Notes Payable - PNB P12,500
Add (2,500 X 67%) __1,675 14,175
Unsecured Creditor with Priority 6,500
Unsecured Creditor without Priority (103,750 X 67%) __69,513
Total P180,188

Corporation in Financial Difficulty Liquidation 125

7-23: a
Unsecured creditors without priority P1,102,500
Estimated deficiency to unsecured creditors:
Loss on realization 551,250
Estimated liquidation expenses 55,125
Total 606,375
Stockholders equity 441,000 165,375
Net free assets 937,125
Liabilities with priority 122,500
Free assets P 1,059,625

7-24: a
Estimated net gain (loss) on realization:
Gain on realization 78,750
Loss on realization (336,700) (257,950)
Estimated claims ( 43,750)
Total (301,700)
Stockholders equity 295,750
 Estimated deficiency P( 5,950)

7-25: b
Notes payable (175,000 140,000) P 35,000
Unsecured liabilities (420,000 52,500) 367,500
Total 402,500
Free assets (157,500 + 210,000) 367,500
Estimated deficiency 35,000

7-26: a
Old receivable (net) P 38,000
Marketable securities 12,000
Old inventory 60,000
Depreciable assets- net 96,000
Total assets to be realized P206,000

7-27: a
Old receivable P 21,000
New receivable 47,000
Marketable securities 10,500
Sales of inventory 75,000
Total asset realized P153,500

7-28: a
Gain on sale of inventory (P75,000 60,000) 15,00"N?
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121212121212121212121212121212121212121212121212121212121212121212121212121212
121212121212121212121212121212121212121212121212121212121212121212121212121212
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P82,000
(B) Creditor Group Amount of Amount to Percentage
Claim be Paid to be paid
Unsecured liabilities with priority P7,000 P7,000 100.0%
Fully secured creditors 50,400 50,400 100.0%
Partially secured creditors 21,000 20,250 * 96.4%
Unsecured creditors without priority 79,000 59,250 75.0%
* P18,000 + (P3,000 X 0.75) = P20,250
(C) See statement of affairs in requirement (A)

Corporation in Financial Difficulty Liquidation 127

Problem 7 2
VC Corporation
Statement of Realization and Liquidation
Month Ended January 31, 2008

Assets to be realized: Assets realized:

Land P10,000 land P 0
Building 43,000 Building 0
Equipment 28,000 Equipment 8,800
Patents __4,400 P85,400 Patents _12,000
P20,800
Assets Acquired 0 Assets not realized:
Land P10,000
Building 43,000
Equipment _13,000 66,000

Liabilities Liquidated: Liabilities to be Liquidated:

Account payable P14,000 Accounts payable P80,000
Loans payable __7,000 21,000 Loans payable _40,000
120,000

Liabilities not Liquidated:

Accounts payable 66,000
Loans payable 33,000 99,000

Gain on realization ___7,600 Loss on realization

___6,200
Total P213,000 Total P213,000

VC Corporation
 Balance Sheet
January 31, 2008

Cash P 6,700 Accounts payable P 66,000

Land 10,000 Loans payable 33,000
Building 43,000 Estate deficit ( 26,300)
Equipment _13,000
Total P 72,700 P 72,700

VC Corporation
Estate Deficit
January 31, 2008

Gain on realization P 7,600

Loss in realization ( 6,200)
Trustee's expenses ( 1,300)
Net gain on realization P 100
Estate deficit, January 1, 2008 ( 26,400)
Estate deficit, January 31, 2008 P(26,300)

128 Chapter 7
Problem 7 3

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November 1

Book Estimated Free

Value Assets Realizable Value Assets
Assets pledged to fully secured creditors:
P60,000 Investments P 69,000
180,000 Accounts receivable 171,000
Total 240,000
Less: Note payable 210,000 P 30,000

Free assets:
66,000 Cash P 66,000
248,000 Accounts receivable 193,500
291,000 Merchandise inventory 180,000
870,000 Plant & equipment 330,000
114,000 Notes receivable 108,300
Patent __12,000 _889,800
Total free assets 919,800
Less: Unsecured liabilities with priority __13,800
Net free asset 906,000
_________ Estimated deficiency (to balance)
60,300
P1,839,000 Total P966,300

Book Creditor's Unsecured

Value Liabilities & Equity Claim Liabilities
Fully secured creditors:
P 210,000 Notes payable P210,000
Unsecured creditor with priority:
Accrued wages P 7,200
Accrued property tax ___6,600
Total P 13,800

Unsecured creditor:
960,000 Account payable P960,000
Accrued expenses 6,300
300,000 Capital stock
__369,000 Retained earnings _______
P1,839,000 Total P966,300

130
Chapter 7

Problem 7 5

a. Total fair value of assets (estimated proceeds) P471,000

Less: Fully and partially secured creditors claim:
Notes payable, interest (secured by receivable and
 inventory) 125,000
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Less: Mortgage payable (including accrued interest) (330,000) P 10,000
Free Assets:
80,000 Cash P 80,000
140,000 Accounts receivable net 126,000
100,000 Inventories 84,000
120,000 Machinery net 40,000
100,000 Goodwill _ _____0 _ 330,000
Total free assets 340,000
Less: liabilities with priority _140,000
Net free assets 200,000
Estimated deficiency (Squeeze figure) _130,000
P1,000,000 P330,000

LIABILITIES AND STOCKHOLDERS' EQUITY

Secured & Unsecured
Priority Non-priority
Claims Liabilities
Liabilities with priority
P120,000 Wages payable P120,000
 20,000 Property taxes payable __20,000
Total P140,000
Fully secured creditors
300,000 Mortgage payable 300,000
30,000 Interest on mortgage payable __30,000
Total P330,000
Unsecured creditors
220,000 Accounts payable P220,000
100,000 Note payable-unsecured 100,000
10,000 Interest payable-unsecured 10,000

Stockholders' Equity
400,000 Capital stock ___
(200,000) Retained earnings (deficit) P330,000
P1,000,000

2. Settlement per peso of unsecured creditors is P.6250 (P200,000/P320,000). No payment is made

for the P10,000 unsecured interest claim.
132 ____ Chapter 7

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Estate equity, March 1 P 40,000

Less: Loss on uncollectible receivables P 800
Loss on sale of inventories 33,200
Loss on sale of land and buildings 60,000
Loss on write off of intangibles 52,000
Administrative expenses _16,400 _162,400
Estate deficit, March 31 P122,400

134 Chapter 7

3. Entries on trustee's books:

2008
April: Mortgage payable 160,000
Cash 160,000
To record payment of secured creditors from
proceeds from sale of Land and buildings.

Administrative expenses payable-new 16,400

Deferred revenue 2,000
Wages payable 6,000
Cash 24,400
To record payment of priority liabilities.

Accounts payable 32,000

Note payable-unsecured 25,600
Cash 57,600
To record payment of P.32 per peso to unsecured
creditors (available Cash of P57,600 divided by
unsecured claims of P180,000).

Accounts payable 68,000

Note payable-unsecured 54,400
Estate equity 122,400
To write-off remaining liabilities and
close trustee's records.