PROFE01-ACCOUNTING FOR SPECIAL TRANSACTIONS

Chapter 3 Corporate Liquidation and Reorganization

Learning Objectives

Describe the accounting for non-going concern entities.

Corporate liquidation

• Liquidation – is the termination of business operations or the winding up of affairs. It is a

process by which

1. The assets of the business are converted into cash,

2. The liabilities of the business are settled, and

3. Any remaining amount is distributed to the owners.

Measurement basis

• For entities undergoing liquidation, the appropriate measurement basis is realizable

value.

 For assets, realizable value is estimated selling price less estimated costs to
sell.

 For liabilities, realizable value is the expected net settlement amount.

Financial reports

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• Liquidating entities usually prepare the following classes of financial reports:

1. Statement of affairs

2. Statement of realization and liquidation

Statement of affairs

• Assets in the statement of affairs are classified into the following:

1. Assets pledged to fully secured creditors – these are assets with realizable values
equal to or greater than the realizable values of the related liabilities for which these
assets have been pledged as security.

2. Assets pledged to partially secured creditors – these are assets with realizable
values less than the realizable values of the related liabilities for which these assets
have been pledged as security.

3. Free assets – these are assets that have not been pledged as security of liabilities.
These also include the excess of realizable values of assets pledged to fully secured
creditors over the realizable values of related liabilities for which these assets have been
pledged.

• Liabilities in the statement of affairs are classified into the following:

1. Unsecured liabilities with priority – these are liabilities that, although not secured by
any asset, are mandated by law to be paid first before any other unsecured liabilities.

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These liabilities include the following: Administrative expenses, Unpaid employee

salaries and other benefits and Taxes and assessments

2. Fully secured creditors – these are liabilities secured by assets with realizable values
equal to or greater than the realizable values of such liabilities.

3. Partially secured creditors – these are liabilities secured by assets with realizable
values less than the realizable values of such liabilities.

4. Unsecured liabilities without priority – all other liabilities not classifiable under (1), (2)
or (3) above.

To know more information about – Chapter 3- Corporate liquidation

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=jCayxJrED7U

To know more information about – Chapter 3- Financial reports

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=_HK5gpg39pY

Reference:

TEXTBOOK-Millan, Accounting for Special Transactions (2018), Philippines: Bandolin

Enterprise

WEBSITE REFERENCES-http://www.iasplus.com/