Since 1977
AFAR
P2. 2402 CORPORATE LIQUIDATION
LECTURE NOTES
CORPORATE LIQUIDATION
Business failures take many forms, common one is the
inability to settle financial obligations as they become due.
If the distressed company liquidates, it enters into
bankruptcy procedures that are court administered
because of legal ramifications.
The process of corporate liquidation would include
realization of assets and the distribution of the cash
proceeds, first to the different creditors, then the balance
to stockholders, if any. Generally, the cash provided would
be less than the amount of all the liabilities so a payment
deficiency to creditors would occur. These activities are
done by a court-appointed trustee under accountability
techniques.
Actual liquidation, however, is preceded by a court-petition
for bankruptcy, voluntary, if filed by the distressed
company itself; involuntary if initiated by its creditors. The
voluntary petition is submitted to the courts for resolution
and a statement exhibiting the petitioner’s debts and
assets (at fair values) accompanies the petition. This
statement is commonly called the Statement of Affairs.
The Statement of Affairs.
It is prepared under a quitting-concern assumption and
makes the following classifications as to assets and
liabilities:
Assets:
(1) Pledged with Fully Secured Creditors – estimated cash
proceeds is equal to or more than the amount of the
secured claim.
(2) Pledged with Partially Secured Creditors – estimated
cash proceeds is less than the amount of the secured
claim.
(3) Free Asset – any asset of the entity that has not been
used to secure the payment of any of the company’s
liabilities and therefore any cash proceeds therefrom is
available to unsecured creditors.
Liabilities
(1) Secured Liabilities – that which is covered by a
collateral asset
(a) Fully-secured – the realizable value of the pledged
asset is at least equal to the amount of the claim.
(b) Partially-secured liabilities – the realizable value of
the pledged asset is less than the amount of the
claim. Every partially secured claim has a secured
portion, which is covered by the realizable value of
the collateral and an unsecured portion, that which
is not covered.
(2) Unsecured Liabilities – that which is not covered by a
pledged asset.
(a) Unsecured liabilities with priority – those that are
specified under the Bankruptcy Law that must be
paid in full ahead of any other type of unsecured
liabilities.
(b) Unsecured liabilities without priority – is any other
type of unsecured liability.
Unrecorded assets with market values are included in
the statement of affairs under free assets category and
are called contingent assets; unrecorded administrative
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DE LEON/DE LEON/DE LEON
BATCH M A Y 2018
and liquidation expenses are categorized as unsecured
with priority, and are called contingent liabilities. The
statement of affairs measures in estimated terms what
payments are to be received by the different types of
creditors in the event of liquidation. A full illustration of
the Statement of Affairs is prepared for Problem 1. A
shorter schedule that could also provide meaningful
information is as follows:
Estimated cash available (Cash on Hand plus Realizable
values of all assets) PX
Less prioritized claims:
Fully secured creditors Px
Secured portion of partially-secured
Creditors x
Unsecured creditors with priority x (x)
(a) Net cash available to unsecured amount Px
Less (b) Unsecured amounts:
Unsecured portion of partially secured
Creditors Px
Unsecured creditors without priority x (x)
Estimated deficiency to creditors P(x)
The estimated recovery rate for unsecured
Amounts: (a)/(b) = ERR%
Another method of estimating the amount of deficiency
to unsecured creditors without priority, using a
different set of data is as follows:
Estimated loss on sale of non-cash assets PX
Plus contingent liabilities X
Estimated gross loss PX
Less: Estimated gain on sale of non-cash
Assets PX
Plus contingent assets X (X)
(x) Estimated net loss P(X)
(y) Compare with carrying value of SHE X
IF (x) and (y) are equal amounts, available cash
covers exactly outstanding liabilities; no defi-
ciency to creditors AND no amount is
recoverable by stockholders.
IF (x) is more than (y), the peso amount
difference is an Estimated Deficiency to
creditors
IF (x) is less than (y), the peso amount
difference is an estimated amount
recoverable by Stockholders.
Accounting and Reporting by the Trustee.
Accounting would be by simple financial records and
reports detailing accountability for the custody of assets
and temporary assumption of liabilities. Assets and
liabilities taken over are recorded in the trustee’s books at
carrying values in the books of the distressed company
upon the transfer. Since the stockholders’ equity items are
not transferred, a reciprocal account, Estate Equity, is
established in the books of the trustee to balance the
accounts. In turn, a reciprocal Trustee Account is
established in the books of the distressed company in
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EXCEL PROFESSIONAL SERVICES, INC.

representation of the net assets transferred out to the
responsibility of the trustee.
1. The trustee is required to prepare the following
periodic statements and reports: (a) Cash receipts and
disbursements statement, (b) a Statement of Estate
Equity; and (c) supporting exhibits of assets still held
and liabilities not yet liquidated as at the end of the
reporting period (balance sheet). The Statement of
Realization and Liquidation could also be required.
-

STRAIGHT PROBLEMS

Problem 1 BRAVEHEART’s estate and liquidate the distressed

The following information is available on September 20,
corporation.
2017, for UNSTABLE CORPORATION, which is having
Cash P 40,000
difficulty in paying its liabilities as they become due:
Accounts receivable, net 80,000
Carrying Amount Inventories 360,000
Cash P 28,672 Land 200,000
Accounts receivable, net, fair value Buildings, net 1,000,000
equal to carrying amount 329,728 Intangible assets 260,000
Inventories, current fair value , Total P1,940,000
P129,024 pledged on P150,528 of Accounts payable P 500,000
notes payable 279,552 Notes payable 400,000
Machinery and equipment, net, Deferred revenue 10,000
current fair value of P483,124 Wages payable 30,000
pledged on mortgage note payable 766,976 Mortgage note payable 800,000
Office supplies, current fair value of Capital stock 400,000
P17,920 14,336 Retained earnings, deficit (200,000)
Wages payable 41,574 Total P1,940,000
Taxes payable 8,602
Accounts payable 430,080 Additional information:
Notes payable, P150,528 of which is 1. The land and the buildings are pledged as security for
secured by inventories 286,720 the mortgage payable.
Mortgage note payable 361,268 2. In January, 2017, BRAVEHEART received P10,000 from
Common stock, P10 par 716,800 a customer as payment in advance for merchandise
Retained earnings, deficit 425,780 that is no longer marketed and thus can no longer be
provided.
Additional information: 3. Activities of the trustee during June are summarized as
(1) Estimated liability to the trustee is P186,368. follows:
(2) A delivery van previously given to the supervisor was a. P72,000 is collected on the receivables.
returned to the company, fair market value, P179,200. b. Inventories are sold for P194,000.
c. Land and buildings bring total of P1,000,000.
REQUIRED: d. Nothing is realized from the intangible assets.
a. Prepare a statement of affairs as of September 20, e. Administrative expenses of P82,000 are incurred
2017. by the trustee.
b. Compute the estimated recoverable amounts to the REQUIRED:
different types of creditors in the event of liquidation. 1. Prepare journal entries in the books of the trustee and
c. Prepare a statement of deficiency to unsecured in the books of the distressed company for the above
creditors. transactions.
Problem 2 2. Prepare a statement of realization and liquidation using
The balance sheet of BRAVEHEART ENTERPRISES at June the conventional format.
1, 2017 follows. At this date an interim trustee was 3. Briefly discuss and illustrate the difference between the
appointed by the court to assume control of Conventional method and the Book Value method of
preparing the required statement in Item #2.

MULTIPLE CHOICE

When LAGUNA COMPANY filed for liquidation with the Common stock 100,000
Securities and Exchange Commission, it prepared the Retained earnings, deficit ( 140,000)
following balance sheet. Total equities P 320,000
1. How much would the holders of the mortgage payable
Current assets, net realizable likely to get?
value, P110,000 P 80,000 a. P 60,000 c. P192,222
Land and buildings, fair value, b. P360,667 d. 241,000
P180,000) 200,000
Goodwill, fair value, P0 40,000 2. What is the estimated deficiency to unsecured
Total assets P 320,000 amounts?
a. P 70,000 c. P192,000
Accounts payable P 160,000 b. P 90,000 d. P140,000
Mortgage payable, secured by
land and building 200,000

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EXCEL PROFESSIONAL SERVICES, INC.

b. P70,800 d. P72,800

PRINCESS COMPANY filed a voluntary bankruptcy petition

CANYON ENTERPRISES filed a voluntary bankruptcy on August 15, 2018 and the statement of affairs reflect
petition on July 31, 2018 and its Statement of Affairs the following amounts:
BOOK ESTIMATED
reflects the following amounts: CARRYING CURRENT
Book Value Current VALUE VALUE
Value Pledged with fully secured P 150,000 P 185,000
Assets: creditors
Pledged with Fully secured Pledged with partially 90,000 60,000
creditor P 520,000 P 410,000 secured creditors 210,000 160,000
Pledged with Partially Free Assets P 450,000 P 405,000
secured creditor 292,500 92,500
Free Assets 350,000 47,500 Liabilities
Totals P1,162,500 P 550,000 Liabilities with priority P 35,000
Fully secured liabilities 130,000
Liabilities: Partially secured liabilities 100,000
Unsecured with priority P 65,000 Liabilities without priority 270,000
Fully secured 402,250 P 535,000
Partially secured 225,000
Unsecured without priority 345,000
9. How much cash will be available to pay the unsecured
Sub-total P1,037,250
amounts?
Stockholders’ Equity
a. P240,000 c. P160,000
Capital stock 147,500
b. P180,000 d. P125,000
Retained Earnings, deficit ( 22,250)
Totals P1,162,500
10. BROOKLYNNE ENTERPRISES. has been forced into
3. The total estimated deficiency is allocable to the bankruptcy and liquidated. Unsecured claims will be
following creditors at the respective amounts shown paid at the rate of P0.70 on the peso. KITKAT
below: ENTERPRISES holds a non-interest bearing note
Unsecured Fully Partially Unsecured receivable from BROOKLYNNE in the amount of
W/priority Secured Secured w/out priority P60,000 collateralized by machinery with a liquidation
a. P 0 P0 P132,500 P289,750 value of P10,000. The total amount to be realized by
b. P 65,000 P0 P225,000 P345,000 KITKAT on this note receivable is:
c. P 9,750 P0 P132,500 P345,000 a. P45,000 c. P25,000
d. P 0 P110,000 P225,000 P289,750 b. P30,000 d. P10,000

4. The estimated payment that will be made to partially 11. The statement of affairs of JEREMIAH CORPORATION.
secured creditors in the event of liquidation at this shows the following:
point is: Estimated gains on realization of
a. P205,125 c. P 92,500 assets P 1,280,000
b. P112,625 d. P225,000 Estimated losses on realization of
assets 2,244,000
Items 5 to 9 are based in the following: Contingent assets 1,000,000
The following data were taken from the statement of Contingent liabilities 300,000
affairs of MARACLARA CORPORATION: Capital stock 2,000,000
Assets pledged for fully secured liabilities Deficit 900,000
(current fair value, P75,000) P 90,000
Assets pledged for partially secured The pro-rata payment on the peso, to stockholders, is:
liabilities (current fair value P52,000) 74,000 a. P0.78 c. P0.76
Free assets (current fair value , P40,000) 70,000 b. P0.43 d. P0.75
Unsecured liabilities with priority 7,000
Fully secured liabilities 30,000 12. The Statement of Affairs for CANDY CORPORATION
Partially secured liabilities 60,000 shows that approximately P0.78 on the peso probably
Unsecured liabilities without priority 112,000 will be paid to unsecured creditors without priority.
The corporation owes TOY COMPANY P23,000 on a
5. The amount that will be paid to creditors with priority
promissory note, plus accrued interest of P940.
is:
Inventories with a current fair value of P19,200
a. P7,000 c. P7,500
collateralize the note payable. Compute the amount
b. P6,000 d. P6,200
that the TOY COMPANY would receive from CANDY
CORPORATION assuming that the actual payments to
6. The amount to be paid fully secured creditors is:
unsecured creditors without priority consist of 78% of
a. P30,000 c. P20,000
total claims. Round all amounts to the nearest peso.
b. P32,000 d. P35,000
a. P19,200 c. P33,987
b. P22,897 d. P52,200
7. The amount to be paid to partially secured creditors
is:
PARAMOUNT INC, a closely-held corporation was
a. P52,700 c. P56,200
undergoing liquidation. The total cash value of
b. P57,200 d. P 57,000
PARAMOUNT’s bankruptcy estate after the sale of all
assets and payment of administrative expenses is
8. The amount to be paid to unsecured creditors is:
P300,000.
a. P78,200 c. P72,000

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EXCEL PROFESSIONAL SERVICES, INC.

PARAMOUNT, INC. has the following creditors: 16. Calculate the total amount recoverable by unsecured
 Builders Bank is owed P182,000 on a mortgage loan creditors without priority:
secured by PARAMOUNT’s real property. The property
was valued at and sold, in bankruptcy, for P144,000. a. P0 c. P 9,880
 The BUREAU of INTERNAL REVENUE has a P24,000 b. P13,000 d . P 24,000
recorded judgment for unpaid corporate income tax.
 Global Office Supplies has an unsecured claim of HARDSHIPS, INC. is undergoing liquidation since August
P6,000 that was timely filed. 1, 2017. Five months later, on December 31, 2017, its
 Starex Electric Company has an unsecured claim of condensed realization and liquidation statement shows the
P20,000 that was timely filed. following:
 Bright Corporation is owed P100,000 in a loan contract Assets:
secured by PARAMOUNT’s notes receivable which To be realized P2,200,000
realized P120,000. Acquired 1,200,000
Realized 1,920,000
13. Calculate the total amount recoverable by partially- Not realized 2,200,000
secured creditors: Liabilities:
a. P0 c. P163,000 Liquidated 3,000,000
b. P166,190 d. P 24,000 Not liquidated 2,720,000
To be liquidated 3,600,000
14. Calculate the total amount recoverable by unsecured Assumed 2,600,000
creditors with priority: Supplementary:
a. P 100,000 c. P163,000 Charges 5,000,000
b. P 13,000 d. P 24,000 Credits 4,680,000

15. Calculate the total amount recoverable by fully 17. The net gain (loss) for the five-month period is:
secured creditors: a. P(520,000) c. P 680,000
a. P 100,000 c. P163,000 b. P 400,000 d. P 880,000
b. P 6,500 d. P 24,000

 - end of afar . 2402 - 

PROBLEM I STATEMENT OF AFFAIRS –

UNSTABLE COMPANY
Free Estimated
Book Value   Assets   Est. RV   Assets   Gain( Loss)
Pledged with FSC:
766,976 Machinery and equipment 483,124 (283,852)
Less Mortgage note payable 361,268 121,856

Pledged with PSC:

279,552 Inventories (deducted contra) 129,024 - (150,528)
Free Assets:
28,672 Cash 28,672 28,672 -
329,728 Accounts receivable 329,728 329,728 -
17,92
14,336 Office supplies 17,920 0 3,584
179,20
- Delivery van 179,200 0 179,200
Estimated Net Loss   ( 251,596)
Estimated Total Amount for Unsecured Creditors 677,376
Less: claims with priority (see contra) 236,544
Estimated net amount for claims w/o priority 440,832
  Estimated deficiency to claims w/o priority 146,944
1,419,264 587,776

Unsecured
Book Value   Liabilities           Amount
Fully secured claims (FSC):
361,268 Mortgage note payable (deducted contra) 361,268
Unsecured claims with priority (ded. contra):
41,574 Wages payable 41,574
8,602 Taxes Payable 8,602
- Estimated Liability to Trustee 186,368 236,544
Partially secured claims (PSC:
150,528 Notes payable 150,528
Less: Realizable value of
Inventories 129,024 21,504
Unsecured claims without priority:

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136,192 Notes payable 136,192

430,080 Accounts Payable 430,080 566,272

Stockholders’ Equity
716,800 Capital Stock
(425,780) Retained Earnings (Deficit)  
1,419,264 587,776

Problem 2 (a) Accounting for Trusteeship Liquidation

BOOKS OF BRAVEHEART
BOOKS OF TRUSTEE ENTERPRISES
40,00
Cash 0 Trustee Account 200,000
Accounts Receivable 80,000 Accounts Payable 500,000
Notes
Inventories 360,000 Payable 400,000
Land 200,000 Deferred Revenue 10,000
Buildings 1,000,000 Wages Payable 30,000
Intangible Assets 260,000 Mortgage Note Payable 800,000
Accounts Payable 500,000 Cash 40,000
Notes Payable 400,000 Accounts Receivable 80,000
Deferred Revenue 10,000 Inventories 360,000
Wages Payable 30,000 Land 200,000
Mortgage Note Payable 800,000 Building 1,000,000
Estate Equity 200,000 Intangible Assets 260,000

Cash 1,266,000 Retained Earnings 716,000

Estate Equity 716,000 Trustee Account 716,000
Accounts Receivable 80,000
Inventories 360,000
Land 200,000
Bldgs 1,000,000
Intangible Assets 260,000
Payable to Trustee 82,000

Mortgage Note Payable 800,000 No Entry

Deferred Revenue 10,000
Wages Payable 30,000
Payable to Trustee 82,000
Cash 922,000

Accounts Payable 213,333 No Entry

Notes Payable 170,667
Cash 384,000

Accounts Payable 286,667 Capital Stock 400,000

Notes Payable 229,333 Trustee Account 516,000
Estate Equity 516,000 Retained Earnings 916,000

(b) Statement of Realization and Liquidation (Conventional Method)

ASSETS
To be Realized: Realized:
Accounts Receivable 80,000 Accounts Receivable 72,000
Inventories 360,000 Inventories 194,000
Land 200,000 Land & Bldgs. 1,000,000
Buildings 1,000,000
Intangible Assets 260,000  
Total 1,900,000 Total 1,266,000

Acquired: - Not Realized -

LIABILITIES
Liquidated: To be Liquidated:
Accounts Payable 213,333 Accounts Payable 500,000
Notes Payable 170,667 Notes Payable 400,000
Deferred Revenue 10,000 Deferred Revenue 10,000
Wages Payable 30,000 Wages Payable 30,000
Mortgage Note Payable 800,000 Mortgage Note Payable 800,000
Payable to Trustee 82,000  
Total 1,306,000 Total 1,740,000

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EXCEL PROFESSIONAL SERVICES, INC.

Not Liquidated: Assumed:

Accounts Payable 286,667 Payable to Trustee 82,000
Notes Payable 229,333  
Total 516,000 Total 82,000

REVENUE & EXPENSES

supplementary
Charges Supplementary Credits
Liquidation Expenses 82,000 -
Total 82,000 - Total

Total Total
Debits 3,804,000 3,088,000 Credits
716,000 Net Loss
3,804,000 3,804,000
SUPPLEMENTARY SCHEDULES:
Cash CAPITAL STOCK RETAINED EARNINGS
32,000 737,600
1,012,800 307,200 320,000 200,000
716,000

CLASSROOM DRILL
The following were taken from the statement of affairs of b. P65,000 d. P56,000
HARASSED COMPANY.
Assets pledged with fully secured P71,000 The following information is available concerning
creditors INSOLVENT, INC. on the date the company entered
Assets pledged with partially secured 12,500 bankruptcy proceedings:
creditors
Free assets 11,000 Account Balance per Books
Preferred creditors 3,000 Cash P3,661
Fully secured creditors 69,000 Accounts receivable 66,893
Partially secured creditors 20,000 Inventory 35,840
Unsecured creditors without priority 18,000 Prepaid expenses 550
1. The estimated deficiency to unsecured creditors is Buildings, net 75,520
a. P 5,000 c. P15,500 Equipment, net 7,168
b. P12,500 d. P14,500 Goodwill 7,232
Wages payable (3,200)
INSOLBENT, INC. has had severe financial difficulties and Taxes payable (2,317)
is considering the possibility of liquidation. At this time, the Accounts payable (101,120)
distressed company has the following assets (stated at net Notes payable (19,392)
realizable value) and liabilities: Common stock (92,160)
Assets (pledged against debts of P 116,000 Retained earnings, Deficit 21,325
P70,000)
Assets (pledged against debts of 50,000 Inventory with a book value of P25,600 is security for
P130,000) notes of P12,800. The other notes are secured by the
Other assets 80,000 equipment.
Liabilities with priority 42,000 Expected realizable values of the assets are:
Unsecured creditors 200,000 Accounts receivable P56,448
2. In the event of liquidation at this point, how much is Inventory 23,680
the estimated amount recoverable by partially-secured Buildings 28,160
creditors? Equipment 2,560
a. P130,000 c. P 74,000
4. What is the estimated deficiency to unsecured creditors?
b. P 50,000 d. P200,000
a. P 11,520 c. P 92,800
b. P 83,840 d. P101,120
The summarized Statement of Realization and Liquidation
for NOMONEY Corporation for 2017 follow: Items 5 and 6 are based on the following:
Assets to be P60,000 Liabilities P50,000
realized assumed
Because of inability to pay its debts, the
Assets 40,000 Liabilities not 65,000 WHAHAPEND MANUFACTURING COMPANY has
acquired liquidated been forced into bankruptcy as of April 30, 2017. The
Assets realized 55,000 Supplementary 110,000 balance sheet on that date shows:
credits ASSETS
Liabilities to be 80,0 Cash P 4,320
liquidated 00 Accounts Receivable 62,960
Retained earnings decreased by P12,000 during the year. Notes Receivable 29,600
The ending balances of ordinary shares and retained Inventories 140,560
earnings are P100,000 and P(75,000), respectively. Prepaid expenses 1,520
3. The beginning balance of cash is Land and building 98,000
a. P57,000 c. P75,000 Equipment 78,080

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EXCEL PROFESSIONAL SERVICES, INC.

P 415,040
LIABILITIES
Accounts payable P 84,000
Notes payable 106,000
Accrued wages 2,960
Accrued taxes 7,440
Mortgage bond payable 144,00
Common stock – P20 par 0
Retained earnings 120,000
(49,360)
P415,040
Additional information:
a. Accounts receivable of P27,120 and notes
receivable of P20,000 are expected to be collectible.
The good notes are pledged to P24,000 of the notes
payable.
b. Inventories are expected to bring in P72,160 when
sold under bankruptcy condition. The said company has the following assets:
c. Land and buildings have an appraised value of Book value Fair value
152,000. they serve as security on the bonds. Current assets P 128,000 P 67,600
d. The current value of the equipment, net of disposal Land 160,000 180,000
cost is P14,400. Building and equipment 160,000 220,000

5. What is the estimated payment to all creditors? 7. How much will the holders of notes payable collect
a. P 164,000 c. P 190,000 following the liquidation?
b. P 344,400 d. P 290,000 a. P216,000 c. P166,000
b. P180,000 d. P240,000
6. Calculate the estimated total amount recoverable on
the notes payable. The GLOOMY COMPANY has the following data in
a. P 72,080 c. P 22,720 connection with its bankruptcy petition with the Securities
b. P106,000 d. P 78,480 and Exchange Commission at the end of 2017.

A distressed corporation is to be liquidated and has the Liabilities without priority P 460,000
following liabilities: Liabilities with priority 220,000
Income taxes P 16,000
Notes payable, secured by land 240,000 Secured liabilities
Accounts payable 166,000 Debt 1, P420,000; value of pledged asset P 360,000
Salary payable, evenly to two employees 12,000 Debt 2, P340,000, value of pledged asset P 200,000
Bonds payable 140,000 Debt 3, P240,000, value of pledged asset P 280,000
Administrative expenses for liquidation 40,000
The company also has a number of other assets that are
not pledged in any way. The creditors holding Debt 2 want
to receive at least P284,000.
8. For how much do these free assets have to be sold so
that Debt 2 would receive exactly P284,000?
a. P 616,000 c. P680,000
b. P 396,000 d. P576,000

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