CORPORATE LIQUIDATION

I
The D Corporation, which is undergoing liquidation, has the following condensed balance sheet as
of July 1, 2008
!ssets "iabilities and #hareholders$ %quity
Cash & '(),000 #alaries &ayable &120,000
*ecei+ables,net- (2.,000 !ccounts &ayable '00,000
In+entory 2'1,000 /onds &ayable 200,000
&repaid %1penses ',000 /an2 "oan &ayable 1,200,000
%quip3ent ,net- (00,000 4ote &ayable 5(.,000
6oodwill 120,000 7rdinary shares 2.0,000
Deficit ,150,000-
Total &2,50.,000 Total &2,50.,000
The ban2 loan payable is secured by the equip3ent ha+ing a boo2 +alue of &(00,000 and a
reali8able +alue of &1,050,0009 7f the accounts payable, &1.0,000 is secured by in+entory
which has a cost of &120,000 and a liquidation +alue of &1'2,0009 The balance of the in+entory
has a reali8able +alue of &00,0009 *ecei+ables with a boo2 +alue and reali8able +alue of
&)2.,000 and &)00,000 respecti+ely ha+e been pledged as collateral on the note payable9 The
balance of the recei+able is esti3ated to be )0: collectible9 In addition to the recorded liabilities
are accrued interest on ban2 loan payable a3ounting to &'0,000, accrued interest on the bonds
payable a3ounting to &18,000, trustee$s fee a3ounting &25,000 and ta1es payable a3ounting
to &21,0009
&repare a #tate3ent of !ffairs in July
Solution:
/; 4*; Classification
Cash '(),000 '(),000 <npledged assets
*ecei+ables ,net- (2.,000 )00,000 !ssets pledge to =ully #ecured Creditors
*ecei+ables ,net- 180,000 <npledged assets
In+entory 2'1,000 1'2,000 !ssets pledge to &artially #ecured Creditors
In+entory 00,000 <npledged assets
&repaid %1penses ',000 > <npledged assets
&roperty and %quip3e (00,000 1,050,000 !ssets pledge to &artially #ecured Creditors
6oodwill 120,000 > <npledged assets
#alaries &ayable 120,000 120,000 &riority Creditors
!ccounts &ayable '00,000 1.0,000 &artially #ecured Creditors
!ccounts &ayable 1)0,000 <nsecured Creditors
/onds &ayable 200,000 200,000 <nsecured Creditors
Interest &ayable 18,000 <nsecured Creditors
/an2 "oan &ayable 1,200,000 1,200,000 &artially #ecured Creditors
Interest &ayable '0,000 &artially #ecured Creditors
4ote &ayable 5(.,000 5(.,000 =ully #ecured Creditors
7rdinary shares 2.0,000
Deficit ,150,000- ,150,000- #quee8e
Ta1es &ayable 21,000 &riority Creditors
Trustees %1penses 25,000 &riority Creditors
Total > >
!ssets =ree &ortion ? "iabilities <nsecured &riority Deficiency
!&=#C>=#C ),000 ? &#C>!&&#C 188,000
<npledged !ssets ).),000 ? <nsecured Creditors ..8,000
? &riority Creditors 1)),000
Total =ree !ssets )52,000 ? )'),000 1)),000 ,150,000-
#quee8e
*eco+ery *ate @ !+ailable !ssets A <nsecured Creditors
*eco+ery *ate @ ,)52>1))- A )')
*eco+ery *ate @ 090)
=ully #ecured Creditors @ 100: of a3ount owed =#C 594,000
&riority Creditors @ 100: of a3ount owed to &riority Creditors 166,000
&artially #ecured Creditors @ 100: of !&&#C B ,,&#C>!&&#C- 1 *ec9 *ate- 1,325,660
<nsecured Creditors @ 100: of a3ount owed to <nsecured Creditors 1 *ec9 *ate 342,340
II
7n July 1, 2008, the records of Cr9 D, trustee in ban2ruptcy for / Corporation, showed the
following
Cash & 50,.00
!ssets to be reali8ed
=urnitures 00,000
/uildings '01,000
Cachinery 1(),000
Copyright '0,800
"iabilities to be liquidated
!ccounts payable 5)0,000
4otes payable 280,000
%state Deficit 18.,.00
During July, Cr9 D sold 3achinery ha+ing a boo2 +alue of &105,000 for &)1,)00 and sold the
copyright for &8.,0009 Cr9 D was paid &(,100 as trustee fee and &1.0,000 was distributed
proportionately to the creditors9
&repare a state3ent of reali8ation and liquidation for July9
Solution:
!ssets to be reali8ed 5(0,800900 !ssets *eali8ed 1.5,)00900
!ssets !ssu3ed > !ssets not reali8ed .)2,000900
"iabilities "iquidated 1.0,000900 "iabilities to be "iquidated 8.0,000900
"iabilities not "iquidated )(',000900 "iabilities !ssu3ed >
#upple3entary Debits (,100900 #upple3entary Credits >
1,..),(00 1,..0,)00
4et Inco3e 000
%state Deficit ,18.,800-
%sti3ated Deficiency ,18.,100-
Alt!n"ti# Solution
/oo2 ;alue of Capital !ccount ,change 18.,.00 to 18.,800, error- ,18.,800-
Increases in !ssets Copyright 5',200
Decreases in !ssets Cachinery ,.',.00-
Cash ,15),100-
Decreases in "iabilities 1.0,000
4et Inco3e 000
%sti3ated Deficiency ,18.,100-
III
The following data were ta2en fro3 the state3ent of reali8ation and liquidation of DEF
Corporation for the quarter ended #epte3ber '0, 2008
!ssets to be reali8ed & ''0,000
!ssets acquired ')0,000
!ssets reali8ed .20,000
!ssets not reali8ed 150,000
"iabilities to be liquidated 5.0,000
"iabilities assu3ed 180,000
"iabilities liquidated ')0,000
"iabilities not liquidated .50,000
#upple3entary credits 510,000
#upple3entary charges .)8,000
The ending balances of capital stoc2 and retained earnings are &'00,000 and &120,000,
respecti+ely9
Ghat is the net inco3e ,loss- for the periodH Iow 3uch is the ending balance of cashH
!9 &1)8,000J &020,000 C9 &,210,000-J &5)0,000
/9 &,1)8,000-J &020,000 D9 &.2,000J &5)0,000
Solution:
!ssets to be reali8ed ''0,000900 !ssets *eali8ed .20,000900
!ssets !cquired ')0,000900 !ssets not reali8ed 150,000900
"iabilities "iquidated ')0,000900 "iabilities to be "iquidated 5.0,000900
"iabilities not "iquidated .50,000900 "iabilities !ssu3ed 180,000900
#upple3entary Debits .)8,000900 #upple3entary Credits 510,000900
1,()8,000 1,800,000
4et "oss 1)8,000
Ghen a corporation is liquidating, another way of co3puting for 4et Inco3eA4et "oss is the abo+e te3plate
This te3plate is deri+ed fro3 the basic concept of Taccount9
"earn first the 3eaning of the accounts
!ssets to be reali8ed
!ssets !cquired
!ssets *eali8ed
!ssets not reali8ed
"iabilities to be "iquidated
"iabilities !ssu3ed
"iabilities "iquidated
"iabilities not "iquidated
#upple3entary Credits
#upple3entary Debits
/eginning /alance of 4on>Cash !ssets /eg
#elf %1planatory Inc
#elling &rice of #old !ssets #elling &rice
%nding /alance of 4on>Cash !ssets %nd
/eginning /alance of "iabilities /eg
#elf %1planatory Inc
#ettle3ent &rice of "iabilities #ettle3ent &rice
%nding /alance of 4on>Cash !ssets %nd
#elf %1planatory
#elf %1planatory
!ssets
''0,000 /eg
')0,000 Inc 5.0,000 Dec ,#quee8e-
150,000 %nd
#elling &rice .20,000
/; of !sset #old ,5.0,000-
6A,"- ,120,000-
"iabilities
5.0,000 /eg
200,000 Dec ,#quee8e- 180,000 Inc
.50,000 %nd
#etlle3ent &rice ,')0,000- #upple3entary Credits 510,000
/; of !sset #old 200,000 #upple3entary Charges ,.)8,000-
6A,"- ,(0,000- 6A" !ssets ,120,000-
6A" "iabilities ,(0,000-
4et 6ain or "oss $16%,000&
I;
! re+iew of the assets and liabilities of 6 Co3pany in ban2ruptcy on June '0, 2008, discloses
the ff
a9 ! 3ortgage payable of &118,000, is secured by building +alued at &'(,000 less than its
boo2 +alue of &102,0009
b9 4otes payable of &50,000 is secured by furniture and equip3ent with a boo2 +alue of
&0),000 that is 'A5 reali8able9
c9 !ssets other than those referred to ha+e an esti3ated +alue of &..,000, an a3ount that
is 05: of its boo2 +alue
d9 "iabilities other than those referred to total &(1,000, which included clai3s with priority
of &2',0009
Iow 3uch was paid to the partially secured creditorsH
!9 &52,'.0 /9 &.8,2)0 C9 &.(,'80 D' P50,(69
Solution:
!ssets =ree &ortion ? "iabilities <nsecured &riority Deficiency
!&=#C>=#C 15,000 ? &#C>!&&#C 11,.00
<npledged !ssets ..,000 ? <nsecured Creditors )8,000
? &riority Creditors 2',000
Total =ree !ssets 5(,000 ? 0(,.00 2',000 ,.',.00-
#quee8e
*eco+ery *ate @ !+ailable !ssets A <nsecured Creditors
*eco+ery *ate @ ,5(>2'- A 0(9.
*eco+ery *ate @ 09.5
=ully #ecured Creditors @ 100: of a3ount owed =#C 11%,000
&riority Creditors @ 100: of a3ount owed to &riority Creditors 23,000
&artially #ecured Creditors @ 100: of !&&#C B ,,&#C>!&&#C- 1 *ec9 *ate- 50,(69
<nsecured Creditors @ 100: of a3ount owed to <nsecured Creditors 1 *ec9 *ate 30,%31
)OINT *ENTURE
I
7n July 2, 2008, ! Co3pany and / Co3pany for3ed the !/ Co3pany, a Koint +enture to
acquire and sell a special type of 3erchandise9 %ach in+ested &.0,000 for an equal interest in the
Koint +enture9 Condensed financial state3ents for ! Co3pany, / Co3pany and for the Koint
+enture, !/ Co3pany are presented below
! Co9 / Co9 !/ Co9
Inco3e #tate3ent
#ales &)00,000 &.00,000 &200,000
In+est3ent inco3e 25,000 25,000 > LLL
Total )25,000 .25,000 200,000
Cost and e1penses '00,000 2.0,000 150,000
4et Inco3e & '25,000 &185,000 & 50,000
! Co9 / Co9 !/ Co9
/alance #heet
!ssets &010,000 &500,000 &.00,000
In+est3ent in !/ Co9 )5,000 )5,000 >LLLL
Total assets &005,000 &)'5,000 &.00,000
"iabilities &.20,000 &'80,000 &200,000
Capital stoc2 2.0,000 200,000 >
*etained earnings 115,000 55,000 >
;enturers, Capital > > 1'0,000
Total "iab and Capital &005,000 &)'5,000 &.00,000
<nder proportionate consolidation, how 3uch is the total assets of ! Co9 on Dece3ber '1,
2008H
!9 &1,280,000 /9 &(10,000 C9 &005,000 D9 &1,110,000
<nder equity 3ethod, how 3uch is the total liabilities to be reported by / Co3pany on
Dece3ber '1, 2008H
!9 &)50,000 /9 &)80,000 C9 &515,000 D9 '80,000
<nder proportionate consolidation 3ethod, how 3uch is the in+est3ent inco3e to be reported
in ! Co3pany$s Dece3ber '1, 2008 consolidated financial state3entH
!9 &25,000 /9 &5,000 C9 >0> D9 &10,000
Solution:
<nder %quity Cethod
In+est3ent in J; Cost
Cash Cost
M
In+est3ent in J; J; Inco3e 1 &":
#hare in J; Inco3e J; Inco3e 1 &":
M
<nder &roportionate Consolidation Cethod ,!fter 3a2ing the Journal %ntry for %quity Cethod-
#hare In J; Inco3e J; Inco3e 1 &":
!ssets J; !ssets 1 : 7wnership
C7# and %1penses J; C7# and %1penses 1 : 7wnership
"iabilities J; "iabilities 1 : 7wnership
#ales J; #ales 1 : 7wnership
In+est3ent in J; Cost B #hare in J; Inco3e
M
<nder %quity Cethod
In+est3ent in J; .0,000
Cash .0,000
M
In+est3ent in J; 25,000
#hare in J; Inco3e 25,000
M
<nder &roportionate Consolidation Cethod ,!fter 3a2ing the Journal %ntry for %quity Cethod-
#hare In J; Inco3e 25,000
!ssets 200,000
C7# and %1penses 05,000
"iabilities 1'5,000
#ales 100,000
In+est3ent in J; )5,000
M
Nuestion1 !nwer is / &(10,000 @ &005,000B200,000>)5,000
Nuestion1 !nwer is D &'80,000
Nuestion1 !nwer is D &0 @ &25,000>25,000
II
D Co3pany and E Co3pany for3ed a Koint +enture, DE Co3pany in 2008 to sell a particular
3erchandise9 #u33ari8ed transactions of the Koint +enture for the year 2008 are as follows
Cash in+est3ents by the +enturers D Co3pany ,)5:- &)00,000 JE Co3pany ,'5:-
&.00,0009 &urchases of 3erchandise on account, &050,000 J %1penses paid, &50,000 J
#ales on account ,1'0: of cost-, &05.,0009
<nder the equity 3ethod, what is the balance of the In+est3ent in Joint ;enture account in the
boo2s of E Co3pany on Dece3ber '1, 2008H
!9 &..0,000 /9 &.00,000 C9 &.)0,(00 D9 &..',.00
<nder the proportionate consolidation, how 3uch is the proportionate share of Koint +enture
assets to be recogni8ed by D Co3pany on Dece3ber '1, 2008H
!9 & >0> /9 &1,218,100 C9 &1,1.0,100 D9 &1,100,)00
Solution:
<nder %quity Cethod
In+est3ent in J; .00,000
Cash .00,000
M
In+est3ent in J; .',.00
#hare in J; Inco3e .',.00
M
An+,! D 443,400
<nder &roportionate Consolidation Cethod ,!fter 3a2ing the Journal %ntry for %quity Cethod-
Cash (50,000
!A* 05.,000
In+entory 100,000
Total !ssets of the J; 1,80.,000
: of 7wnership )5:
1,21%,100
III
D, % and = for3ed a Koint +enture to sell personali8ed shirts during the ca3paign period9 Their
transactions during the two>3onth period are su33ari8ed below in The boo2s of = being the
3anager is used by the Koint +enture9
June 12 In+est3ent of 3erchandise by D &11(,000
1. In+est3ent of cash by % .5,000
10 In+est3ent of cash by = '0,000
1( In+est3ent of 3erchandise by % (8,000
20 =reight>in (,000
20 Cash sales 285,000
21 Cash sales 08,000
2( Githdrawal of 3erchandise by % 18,000
July 5 &urchases .(,000
10 Githdrawal of cash by D 1),000
21 #elling e1penses 0,000
'1 <nsold 3erchandise charged to D 10,000
The contractual arrange3ents include distribution of gains and losses as follows D, 25:J %,
'5:J and =, .0:9 The +enture is co3pleted and ter3inated on July '1, 20089
In the final settle3ent, how 3uch would each +enturer recei+eH
D % =
!9 &(',000 &125,000 &'0,000
-' P120,250 P163,150 P(3,600
C9 &1'0,250 &1)',150 &.',)00
D9 &120,250 &1)',150 &.',)00
Solution 25: '5: .0:
Cash 4on>Cash @ "iabilities D % = Joint ;enture
/alance '50,000 > @ > 10',000 125,000 '0,000 ((,000
!dKust !sset 10,000 @ 10,000
4et inco3e @ 20,250 '8,150 .',)00 ,10(,000-
#ale of !ssets ,10,000- @ ,10,000-
/al b. settle3ent '50,000 > @ > 120,250 1)',150 0',)00 >
#ettle3ent ,'50,000- > @ > ,120,250- ,1)',150- ,0',)00- >
> > @ > > > > >
Joint ;enture
e1penses inco3e
((,000
10,000 unsold 3erchandise
10(,000
;I
7n 7ctober 1, 2008, D, E and F for3ed a Koint +enture for the sale of 3erchandise9 D was
designated as the 3anaging +enturer9 &rofits and losses are to be di+ided as follows D, )0:J
E 15: and F 25:9 7n Dece3ber 15, 2008, the +enture was ter3inated, the participants
agreed to recogni8e profit or loss on the +enture to date9 The cost of in+entory on hand is
deter3ined at &.0,0009 The Koint +enture account has a debit balance of &)8,000 before
adKust3ent for +enture in+entory and profit, no separate set of boo2s is 3aintained for the Koint
+enture and the participants record in their indi+idual boo2s all +enture transactions9
/efore profit or loss distribution, assu3ing E has a credit capital balance of &(,.50, in the final
settle3ent, what is the a3ount due to ,fro3- EH ,indicate whether due to or due fro3-
!9 &12,)00 due to C' P6,300 .u to
/9 &),'00 due fro3 D9 &12,)00 due fro3
Solution )0: 15: 25:
Cash 4on>Cash @ "iabilities D E F Joint ;enture
/alance > @ > (,.50 ,)8,000-
!dKust !sset .0,000 @ .0,000
4et inco3e @ ,12,)00- ,',150- ,5,250- 21,000
#ale of !ssets @
/al b. settle3ent > .0,000 @ > ,12,)00- ),'00 ,5,250- >
#ettle3ent > @ > >
> .0,000 @ > ,12,)00- ),'00 ,5,250- >
Joint ;enture
e1penses inco3e
,)8,000-
.0,000 unsold 3erchandise
,21,000-
/efore profit or loss distribution, assu3ing F has a debit capital balance of &11,805, in the final
settle3ent, what is the a3ount due to ,fro3- FH ,indicate whether due to or due fro3-
!9 &),)25 due fro3 C9 &),)25 due to
/9 &10,125 due to D' P1(,125 .u /!o0
Solution )0: 15: 25:
Cash 4on>Cash @ "iabilities D E F Joint ;enture
/alance > @ > ,11,805- ,)8,000-
!dKust !sset .0,000 @ .0,000
4et inco3e @ ,12,)00- ,',150- ,5,250- 21,000
#ale of !ssets @
/al b. settle3ent > .0,000 @ > ,12,)00- ,',150- ,10,125- >
#ettle3ent > @ > >
> .0,000 @ > ,12,)00- ,',150- ,10,125- >
Joint ;enture
e1penses inco3e
,)8,000-
.0,000
,21,000-
unsold 3erchandise
1n. o/ 2"n.out+1