Professional Documents
Culture Documents
Corporate Liquidation PDF
Corporate Liquidation PDF
INSOLVENCY
happens when the debtor corporation’s TOTAL LIABILITY > TOTAL ASSETS at fair valuation.
CORPORATE LIQUIDATION
process initiated by filing a voluntary petition with Securities and Exchange Commission
(SEC) by a company which is given three years from the date of approval to wind its affairs.
SEC appoints a trustee/receiver that focuses on realization of assets and payment of
liabilities.
STATEMENT OF AFFAIRS
Initial report that shows the available asset values and liabilities of the corporation as of a
given date.
Its intended purpose is to provide creditors with an indication of the state of their claims at a
particular point in time.
ASSETS – valued at current fair values
Assets and liabilities are classified according to the rankings and priority
ASSETS LIABLITY
Pledged to fully secured creditors Fully secured creditors
Pledged to partially secured creditors Partially secured creditors
Free assets Unsecured creditors
Liability with priority
Format:
STATEMENT OF AFFAIRS
1
Liabilities with priority (xx)
Net Free Assets xx
Estimated deficiency (to balance) xx
xx xx
Illustration:
The M Corporation, which is undergoing liquidation, has the following condensed balance
sheet as of April 1, 20x6:
The bank loan payable is secured by the equipment having a book value of P900,000 and a
realizable value of P1,050,000. Of the accounts payable, P140,000 is secured by inventory
which has a cost of P120,000 and a liquidation value of P132,000. The balance of the inventory
has a realizable value of P70,000. Receivables with a book value and realizable value of
P624,000 and P600,000 respectively have been pledged as collateral on the note payable. The
2
balance of the receivable is estimated to be 60% collectible. In addition to the recorded liabilities
are accrued interest on bank loan payable amounting to P30,000, accrued interest on the bonds
payable amounting to P18,000, trustee’s fee amounting P25,000 and taxes payable amounting
to P21,000.
M Corporation
Statement of Affairs
April 1, 20x6
3
BOOK SECURED UNSECURED
VALUES AND PRIORITY NONPRIORITY
CLAIMS CLAIMS
LIABILITIES AND STOCKHOLDER’S EQUITY
Liabilities with priority:
120,000 Salaries Payable 120,000
-0- Taxes Payable 21,000
-0- Trustees Expenses 25,000
166,000
Fully secured creditors:
594,000 Notes Payable 594,000
Partially secured
creditors:
140,000 Accounts payable 140,000
1,200,000 Bank Loan Payable 1,200,000
-0- Interest Payable 30,000
1,370,000
Value of pledged
assets:
Inventory 132,000
Equipment 1,050,000 (1,182,000) 188,000
Unsecured creditors:
160,000 Accounts Payable 160,000
270,000 Bonds Payable 270,000
-0- Interest Payable 18,000 448,000
Stockholder’s Equity
90,000 -
2,574,000 636,000
ESTIMATED RECOVERY
An estimate of how much will be received by unsecured creditors without priority for each
peso owed to them.
4
636,000
Realization activities:
ASSETS (EXCEPT CASH)
Assets to be realized Assets realized
Assets acquired Assets not realized
5
Liquidation activities:
LIABILITIES
Liabilities liquidated Liabilities to be liquidated
Liabilities not liquidated Liabilities incurred
Format:
STATEMENT OF REALIZATION AND LIQUIDATION (Traditional)
ASSETS
Assets to be realized xx Assets realized xx
Assets acquired (new) xx Assets not realized xx
LIABILITIES
Liabilities liquidated xx Liabilities to be liquidated xx
Liabilities not liquidated xx Liabilities incurred (new) xx
INCOME (LOSS) AND SUPPLEMENTARY ITEMS
Supplementary Expense xx Supplementary Revenues xx
Illustration:
On July 1, 2016, the records of Mr. Marvin, trustee in bankruptcy for Jolay Corporation, showed the
following:
Cash P 57,400
Assets to be realized: Liabilities to be liquidated:
Furniture 70,000 Accounts payable 560,000
Building 301,000 Notes Payable 280,000
Machinery 196,000 Estate Deficit 184,400
Copyright 30,800
During July, Mr. Marvin sold machinery having a book value of P105,000 for P61,600 and sold the
copyright for P84,000. Mr. X was paid P9,100 as trustee fee and P147,000 was distributed
proportionately to the creditors.
6
Jolay Corporation
Statement of Realization and Liquidation
For the month ended July 31,2016
ASSETS
Assets to be realized Assets realized
Furniture 70,000
Building 301,000 Machinery 61,600
Machinery 196,000
Copyright 30,800 597,800 Copyright 84,000 145,600
Assets acquired - - Assets not realized
Machinery 91,000
Furniture 70,000
Building 301,000 462,000
LIABILITIES
Liabilities liquidated Liabilities to be
Accounts Payable 98,000 liquidated
Notes payable 49,000 147,000 Accounts payable 560,000
Notes payable 280,000 840,000
Liabilities not liquidated Liabilities incurred - -
Accounts Payable
Notes Payable 462,000
231,000 693,000
INCOME (LOSS) AND SUPPLEMENTARY ITEMS
Supplementary Expense 9,100 Supplementary Revenues - -
7
STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS
8
PROBLEMS:
1. Alay Company filed a voluntary bankruptcy petition on April 06, 2015 and the statement of
affairs reflects the following amounts:
Assume that the assets are converted into cash at the estimated current values and the
business is liquidated. What total amount of cash should the partially secured creditors
receive?
2. In 2016, Marsya Corp. was forced into bankruptcy and begun to liquidate. The following
selected account balances were taken from its statement of affairs:
9
Liabilities Book Value Unsecured Amount
Fully secured creditors Php 16,000 Php 0
Partially secured creditors 75,000 25,000
Unsecured creditors 155,000 155,000
a. What is the total amount available for payment of claims of unsecured creditors?
b. What is the estimated amount of liquidating dividend per peso claim?
c. What is the amount of deficiency to creditors?
3. In March 2015, it was determined that it is necessary to complete the work in process of Glenn
Corp. To complete the work in process, Php 10,000 book value of raw materials and supplies
and Php 10,000 conversion cost will be required. When completed, these goods will probably
sell for approximately Php 50,000. The raw materials, which have a book value of Php 40,000,
have an estimated total realizable value of Php 20,000. What is the estimated amount that will
become available for unsecured creditors as a result of the realization of the work in process?
4. The following selected account balances were taken from the balance sheet of Move on Corp.
as of December 31, 2016, immediately before the takeover of the trustee:
Marketable securities have present value of P320,000. These securities have been pledged
to secure notes payable of P280,000.
The estimated worth of inventories is P70,000. However, inventories with book value of
P50,000 have been pledged to secure notes payable of P60,000. The realizable value of the
inventories pledged is estimated to be P40,000.
Land and building are estimated to have a total realizable value of P450,000. This property
is pledged to secure the mortgage payable of P250,000.
a. What is the estimated amount available for preferred claims and unsecured creditors out of
assets pledged with fully secured creditors?
b. What is the total amount of free assets?
10
5. The accountant of Tulo Corp. prepared a statement of affairs. Assets which there are no claims
or liens are expected to produce P700,000. Unsecured claims of all classes totaled to
P10,050,000. The following data are claims deemed outstanding:
11