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Suggested Answers: Exercises
Suggested Answers: Exercises
CHAPTER 14
SUGGESTED ANSWERS
EXERCISES
Exercise 14 - 1
Exercise 14 - 2
When there are mutual debts between a bankrupt and a creditor, one balance is set off against the other
and only the difference is recognized for purpose of settlement. Therefore:
(1) Under the heading "Unsecured Creditors", the cash in the savings account with AB
Bank, P7,000, will be applied against the cash overdraft in the checking account with AB
Bank, P9,000, and the overdraft excess of P2,000 will be extended to the "Amount
Unsecured" column;
(2) Under the heading "Free Assets", the cash overdraft in the checking account with CD
Bank, P3,000, will be applied against the cash balance representing sinking fund
accumulation with CD Bank, P33,000, and the sinking fund excess of P30,000 will be
extended to the "Estimated Amount Available" column.
Book values of the asset and liability items would be listed in the "Book Value" columns within the
sections indicated above, with subtraction items being reported as negative balances in the "Book Value"
columns.
Exercise 14 - 3
Chapter 14 – Suggested Answers page 2
Free assets:
20,000 (a) Mercury stock (200 shares) P22,000 22,000 ( 2,000)
40,000 (b) Work in process:
Est. value upon completion P36,000
Materials ( 1,000)
labor ( 4,000) 31,000 31,000 9,000
24,000 (c ) Materials
Required to complete WIP P 1,000
Balance, est. to realize 25,000 26,000 26,000 ( 2,000)
Book Amount
Value Liabilities and Stockholders' Equity Unsecured
P21,000 Fully secured creditors:
Claims (deducted contra) P21,000
Exercise 14 - 4
Cameron Company, Debtor
Chapter 14 – Suggested Answers page 3
Deficiency Statement
Exercise 14 - 5
Clippers Company, Debtor
Statement of Affairs
November 30, 2008
Creditors
With Fully Partly
Liabilities Priority Secured Secured Unsecured
Mortgage payable P200,000
Notes payable P 80,000 P 20,000
Liabilities with priority P 30,000
Unsecured liabilities 210,000
Totals P 30,000 P200,000 P 80,000 P230,000
PROBLEMS
Problem 14 - 1
Broadway
Statement
January
Estimated Loss (Gain)
Book Appraised Amount on
Value Assets Value Available Realization
Assets pledged with fully secured creditors:
P60,000 Merchandise inventory P P 18,,000
42,000
Less Claim: Note payable and accrued interest
(see contra) 40,400 P 1,600
Assets pledged with partly secured creditors:
36,000 Delivery equipment (deducted contra) P 8,000
28,000
Free assets:
9,700 Cash 9,700 9,700
41,000 Notes receivable and accrued interest 26,800 26,800 14,200
87,000 Accounts receivable 75,000 75,000 12,000
20,000 Merchandise inventory 14,000 14,000 6,000
8,000 Furniture and fixtures 9,000 9,000 (1,000)
50,000 Goodwill 0 0 50,000
1,000 Prepaid insurance 0 0 1,000
P 108,200
Estimated amount available P136,100
Creditors with priority (see contra) 12,800
Estimated amount available to unsecured creditors
without priority (approximately P.71 on the peso) P123,300
Estimated deficiency to unsecured creditors 49,900
P312,700 P173,200
Company
Chapter 14 – Suggested Answers page 5
of Affairs
31, 2008
Book Amount
Value Liabilities and Stockholders' Equity Unsecured
Creditors with priority:
Estimated liquidation expenses P12,000
P 800 Accrued salaries and wages 800
Total (deducted contra) P12,800
Fully secured creditors:
40,000 Notes payable P40,000
400 Add Accrued interest on notes payable 400
Total (deducted contra) P40,400
Partly secured creditors:
30,000 Notes payable P30,000
900 Add Accrued interest on notes payable 900
Total P30,900
Less security; Delivery equipment (see contra) 28,000 P 2,900
Unsecured creditors:
30,000 Notes payable P30,000
300 Add accrued interest on notes payable 300 30,300
136,000 Accounts payable 136,000
Notes receivable discounted 4,000
Stockholders' equity:
100,000 Capital stock
10,000 Premium on stock
(35,700) Deficit
P312,700 Total unsecured liabilities P173,200
Problem 14 – 1 – Req. 2
Chapter 14 – Suggested Answers page 6
Problem 14 –2 (Req. 2)
Chapter 14 – Suggested Answers page 7
Crooked Company
Deficiency Statement
July 1, 2008
Additional liabilities:
Estimated liquidation expenses P25,000
Accrued wages 800 25,800
Deduct:
Estimated gains on realization of assets:
Intangibles 4,998
Problem 14 – 2 (Req. 1)
Crooked
Statement
Chapter 14 – Suggested Answers page 8
July
Estimated Loss (Gain)
Book Appraised Amount on
Value Assets Value Available Realization
Assets pledged with fully secured creditors:
P60,000 Land P140,000 P20,000
100,000 Buildings
Less claim: First mortgage bonds and accrued
interest (see contra) 123,000 P17,000
Assets pledged with partly secured creditors:
42,000 Finished goods (deducted contra) P 36,000 6,000
Free assets:
8,100 Cash 8,100 8,100
79,000 Accounts receivable 73,000 73,000 6,000
42,000 Finished goods 36,000 36,000 6,000
70,000 Work in process:
Est. value upon completion P80,000
Less cost to complete 30,000 50,000 50,000 20,000
40,000 Materials 28,000 28,000 12,000
40,000 Patterns, jigs, and tools 8,000 8,000 32,000
70,000 Machinery and equipment 16,000 16,000 54,000
2 Intangibles 5,000 5,000 ( 4,998)
2,000 Prepaid insurance 0 0 2,000
P153,002
Estimated amount available P241,100
Creditors with priority (see contra) 33,500
Estimated amount available to unsecured creditors _______
without
priority (approximately P0.75 on the peso) P207,600
_______ Estimated deficiency to unsecured creditors 68,200
P553,102 P275,800
Company
of Affairs
Chapter 14 – Suggested Answers page 9
1, 2005
Book Amount
Value Liabilities and Stockholders' Equity Unsecured
Creditors with priority:
Estimated liquidation expenses P 25,000
P 7,700 Accrued wages 8,500
Total (deducted contra) P 33,500
Fully secured creditors:
120,000 First mortgage bonds P120,000
3,000 Add Accrued interest on mortgage bonds 3,000
Total (deducted contra) P123,000
Partly secured creditors:
50,000 Notes payable P 50,000
1,200 Add Accrued interest on notes payable 1,200
P 51,200
Less security: Finished goods (see contra) 36,000 P 15,200
Unsecured creditors:
77,000 Notes payable P 77,000
3.600 Accrued interest on notes 3,600 80,600
180,000 Accounts payable 180,000
Stockholders" equity:
200,000 Common stock
31,000 Additional paid-in capital
(120,398) Deficit
_______ _______
P553,102 Total unsecured liabilities P275,800
Problem 14 - 2
Crooked Company
Chapter 14 – Suggested Answers page 10
Percentage Amount to
Payment Claim be Paid
Creditors with priority:
Estimated liquidation expenses 100% P 25,000 P 25,000
Accrued wages 100 8,500 8,500
P 33,500
Fully secured creditors:
First mortgage bond 100% P120,000 P120,000
Accrued interest on bonds 100 3,000 3,000
P123,000
Partly secured creditors:
Notes payable ----- P 50,000 --------
Accrued interest on notes payable ----- 1,200 --------
P 51,200
Secured 100% 36,000 P 36,000
Unsecured 75 P 15,200 11,400
P 47,400
Unsecured creditors:
Notes payable 75% P 77,000 P 57,750
Accrued interest on notes payable 75 3,600 2,700
Accounts payable 75 180,000 135,000
P195,450
Note relative to "Summary of Estimated Payments to Creditors": Estimated payment on the unsecured
portion of the notes of P11,400, and on the remaining unsecured liabilities, P195,450, results in a total of
206,850, which is p750 less than the estimated amount to become available to unsecured creditors as
reported by the statement of affairs. The discrepancy emerges because the estimated amount available as
determined by the statement is actually slightly more than the 75% figure and the resulting discrepancy
is not objectionable, however, in view of the fact that the data are presented as estimates and a refinement
of such data would suggest a degree of accuracy that is not attainable.
Problem 14 - 6
Payless
Statement
Chapter 14 – Suggested Answers page 11
June
Estimated Loss (Gain)
Book Appraised Amount on
Value Assets Value Available Realization
Assets pledged with fully secured creditors:
P 80,000 Accounts receivable P 80,000
Less claim; Notes payable (see contra) 60,000 P20,000
26,000 Land P 50,000 (P 24,000)
180,000 Buildings 200,000 ( 40,000)
240,000 Machinery 150,000 90,000
Total P420,000
Less claim: Mortg.and accrued int. (see contra) 264,800 155,200
Free assets:
4,000 Cash P 3,000 3,000 1,000
60,000 Accounts receivable P60,000
Add credit balance (see contra) 10,000 70,000 70,000
120,000 Finished goods 100,000 100,000 20,000
80,000 Materials, expected to be realized as
finished goods P140,000
Less cost to complete 20,000 120,000 120,000 ( 40,000)
40,000 Goodwill 0 40,000
10,000 Prepaid expenses 0 ______ 10,000
P 58,600
Estimated amount available P468,200
Creditors with priority 83,000
Estimated amount available to unsecured creditors P385,200
w/o priority
_______ Estimated deficiency to unsecured creditors 36,400
P880,000 P421,600
(2) Estimated settlement per peso of unsecured liabilities: estimated amount available, P385,200,
divided by total unsecured liabilities, P421,600, 91% or P0.91 on the peso.
Corporation
of Affairs
30, 2008
Chapter 14 – Suggested Answers page 12
Book Amount
Value Liabilities and Stockholders' Equity Unsecured
Chapter 14 – Suggested Answers page 13
Unsecured creditors:
130,000 Accounts payable 130,000
170,000 Notes payable 170,000
Accounts receivable (credit balances) 10,000
Unbilled auditor's fee 10,000
Estimated liability on pending damage suit 100,000
Stockholders' equity:
200,000 Common stock
(40,000) Retained earnings (deficit)
_______ _______
_
P880,000 Total unsecured liabilities P421.600
Problem 14 – 8
Mackintosh
Statement
November
Estimated Loss (Gain)
Book Appraised Amount on
Value Assets Value Available Realization
Chapter 14 – Suggested Answers page 14
P921,500 P362,500
(2) Estimated amount available, P322,050, divided by total unsecured liabilities, P362,500, equals
estimated amount payable on claims, 89% or 89 centavos on the dollar.
Company
of Affairs
01, 2008
Book Amount
Value Liabilities and Stockholders' Equity Unsecured
Chapter 14 – Suggested Answers page 15
2.
Mackintosh Company
Deficiency Statement
November 1, 2008