ReSA The Review School of Accountancy R. Papa Cor. S. H. Loyola Sts., Sampetoc, Manila &@ TEL NOS. 734-39-89 & 735-98-07 ADVANCED FINANCIAL ACCOUNTING Corporate Liquidation & REPORTING Enterprises in Financial Difficulty. Business Failure 13° & comon phenorenon in a free enterprise company. It may be due to a variety of reasons Such as. incompetent management, poor operating control, inadequate financing, ‘oF other Unexpected adverse developments. Among the inevitable symptoms of rusiness failure 1s a shortaye cf funds or a lack of liquidity, which results in the enteprige’s inability to meet .*» current obligations as they become due. Laquidsty. Liquidity reters wainly to a firm's ability to meet its short~ term obligations, while solveicy relates to the longer time span of obligation. Both of these situations are interrelated. An auditor who examines the financial statements of an enterprise with a history of losses and resulting financial Gifficulties and which may even be in default of loan agreement covenants must, ‘at some point, evaluate the enterprise's ability to survive financially. If there is evidence that the ability of the enterprise to continue as a going concern can no longer be safely assumed, the audizcr may have to qualify his or her opinion, Or, in sone cases disclaim en opinion. Insolvency. A business enterprize can be insolvent in the conventional (or equity) sense when it is unable ic pay off its liabilities as they become due. The enterprise is insolvent in the :egal sense when the financial condition is such that the sum of the eatity's debcs is greater than all of such entity’ property at fair valuation. Thus, in the legal sense, an enterprise remains Solvent as long as the fair valve of its assets exceeds its liabilities, even though the enterprise cannot mect its current maturing obligations because of an insufficiency of Jiquid resources. Liguidations. When the financral position of the debtor is such that it cannot resolve its financial difficulties by any of the following quess~ reorganization, troubled-debt restructu:ing, and dacion-en-pago accounting, the corporation will have to resort to a liquidation. This process may be started by the debtor filing a debtor's voluntary petition or creditor’s involuntary petition. Trustee in Bankruptoy. The duties of the trustee in liquidations are similar to those in a reorganization except that the focus is on a realization of Gosets. and a liquidation of, Liabilities rather than on preservation and Continuation of business. In addition, the trustee must assume control over the assets of the debtor, convert assets into cash, and liquidate the business Cnpeditiously ae is compatible with the best interests of affected parties. In the course liquidation, the trustee may continue business activities, if that is in the interest of ar orderly liquidation. ‘Acoounting and Reporting for Liquidation. The basic focus of accounting for a bankrupt is that of @ “quittiag concern” rather than a “going concern,” Gnich is the usual assumption in accounting, The statement that has been devised for that purpose is the statenent of eftairs, which is hypothetical or pro-forma int hature and. which represents the best estimate on the outcome of the Liquidation of a debtor's business. Basic Reports Prepared in Corporate Liquidation: i Statement of Affaire, This statencnt is prepared as of a given point in time for a business enterprise entering dato the stage of liquidation. The purpose of this statement is to display the essets and liabilities and of Che debtor enterprise from a liquidation viewpoint, because liquidation is the outcome of the bankruptcy proceedings. Thus, assets displayed in the Statement of affairs are valued at current fair values; carrying amounts are presented on 2 memorandum basis, 2. Statement of Realization and Liquidation. This is an activity statement that is intended to show progress, i.e., actual transactions toward the Liquidation of a debtor's estate, ts original purpose is to inform the pankeuptcy court and interested creditors of the accomplishments of the trustee. che Statement of Realisation and Liquidation differs from the statement of Affaire in the following respects: i. ‘The statement of realization and liquidation reports the actual Liquidation results. In contrast, the statement of affairs is of « pro- forma nature and is bused cn estimates rather than actual results. 2. The statenent of realization and liquidation provides an oagoieg reporting of the trustes’s activities ond is updated throughout the Liguidstioa procass. The statement of affairs is s summary of the ‘estimated results cf a completed Liquidation. 03ADVANCED FINANCIAL ACCOUNTING 6 REPORTING page 2 1 Corporation filed a petition on July nto tankruptcy. The court order for stich tine an interim trustee was he estate. A Listing of assets and fF taaolve Corperstien as of July 19, 2016, along with ~ Tok value FL, a0 Foueivable 755, 000] ince tor D/A > unsecured creditors 1 2016 to force 1 ef was granted on appainted to supery se . igus Tof the accounts receivable is 0,000) estimated to be uncollectible Srtories ou] Estimated selling price, P340, 000 which will require additional costs of P50, 000 Thal expense — 2 vestment F110, 000 Tana Buridings (net), Ba ol fer of P500,000 has been rece:ved for land and buildings P53, 900 Goodwill Total Assets Liabilities ¢ Equity Recounts payable _ wages payable Notes payable Accrued intere notes. _ Mortgage payable, secured by and bu: s ‘pital stock Additional paid-in capital Deficit [Total Liab. Additional 1 a. Paten realizable value of The books expenses /ad¢ = books in past years but with a roliewing accruals (unrecerded Taxe: os P16, 400 Interest 9n mort gage 10,000 c. The investment have been piedged as security for holder of the notes payable. d. The trustee fees and cthor costs liquidating the estate are estimated to be F60,0u0. Determine: . The total free assets should a. P1,831, 400 £717,800 b. 1,821, 100 638, 000, 2. The net free assets should he: a. P717,800, GC b. 698,000 a, 3. The estimated deficiency 19 unsecured creditors should be: a. P87, 000 + 827,000 b. 47,890 d. 7,200 4. The expected recovery gerventa:* of unsecured creditors should bet a. 96,008 =. 48.00) b. 95.008 re. 62 5. The estimated paymo:t io cred.tors should bet Unsecured Creditors Fully Secured ted With priority Without Priority a. P 410,000 79, 800, 638, 000. ». 500,006 0, 00 589, 600 c. 410,000 79,800 * 670, 00 a. 410,006 19, 800 589, 69: AFAR-03ADVANCED FINANCIAL ACCOUNTING & REPORTING pege 3 6. The estimated payment to creditors should be: a. 1,324,800 cc. P1, 264,800 b. 1,308,000 4. 1,237,800 ; The estimated net gain or loss on asset realization should be: 583, 600 c. P670,000 b.” 593,600 4. 680,000 5. The estimated net loss should & 2. P583, 600 c. P670,000 b. 593,600 4. 680,000 qr Parcinc Dissolved Corporation filed a voluntary petition for bankruptcy on January 2016. On March 31, 2016, the trustee provided the following formation about the corporation's financial affairs: Retinated Book Value Realisable Values cash P 40,000 40,000 Accounts receivable - = 209,000 150, 000 Inventories 300, 000 140, 000 Plant assets - net 500, 000 560, 000 Total Assets Pi,040,.000 Liabilities Liabilities for priority claims P 160,000 Accounts payable-unsecured 300, 000 Notes payable, secured by Accounts receivable 200, 000, Mortgage payable, sec by all plant assets tal liabilities ea Determine he amount expected to be svailable for unsecured claims without priority (net free assets): a. P 300,000 ce. P 140,000 b. 580,000 d. 310,000 2. The expected recovery per peso 2f unsecured creditors: a. P .215 c. P 415) be .223 4. .400 3. The estimated payment to creditors: a. P730,000 . P77, 000 b. 45,000 4. 890,000 qr ‘The following information was available on March 31, 2016 for Bankrupt Corporation, which they cannot pay their liabilities when they are due: Carrying Amounts cash P 16,000 Trade accounts receivable (net): Current fair value equal to cerryiug amount 184,000 Inventories: Net realizable value, P72, 000; pledged on P84,000 of notes payable 156,000 Plant assets: Current fair value, P269, 600; pledged on mortgage notes payable 536,000 Accumulated depreciation of plant assets 108,000 Supplies: Current fair value, P6,000 8,000 Wages payable, all earnec during March 23,200 Property taxes payable 4,800 Trade accounts payable 240,000 Notes payable, P84,000 secured by inventories 160,000 Mortgage payable, including accrued interest of Pl, 600 201, 600 Common stock, P5 par 400, 000 Deficit 237,600 AFAR-03ADVANCED FINANCIAL ACCOUNTING & REPORTING page 4 Determine: The est ca 5 ct thas.tation of assets: oP P 15m, 400 b. 84 3. The est dqain. on resitzation of assets: . ce P 158,400 84,000 3. 244,400 3 expected recovery perccntage of unsecured creditor! b. 78 $. The estimated deficiency to ur reditors: 1000 €. P 70,000 87,07 a. 54,000 IV ~ Statement of Realization and Liquidation and Statement of Estate Deficit any had a very unstable financial condition caused by a ts. On February 4, 2016, the following © Liguid Con ency of liquid as. ation was available: cask P 112,000 Assets Not Realized: Accounts Recs ival 80,000 Merchandise inventery 160,000 Investment. in common atork 26,400 Lana 100,000 Buzldings 60,000 Machinery and eq 48,000 Liabilities Not Licui lated: Notes Payab-e © 244,000 Accounts payable 288,000 Salaries and Wages 40,000 Taxes pay=o%c 8,000 Bank loan 180, 000 ate defici (173,690) ¥ 31, 2016, the trustee sold th alized PB4,060 for the accounts for P152,000, and paid-off 26,000 of wath priorities (salaries, anc wages 27,440 for estate administration h per-od in Common St receivable, sold the ner the bank 1 payable, taxes payable) penses. an and ali ii Determine: 1. The estate deficit, 3 (vay 31, 2016) should be: a. P161,760 Pi85, 440 b. P178, 000 i. D189, 440 The net (gain) loss 2x realizotion and Liquidation should ber a. P11,840 loss c. P15, 840 loss b. P1,840 gain d. ?4,400 loss The cash balance, ending (3 + 2616) sho a. Zero + £183,001 b. £185,440 4 ##Achioverent cones from the person who dareat*# ‘s#eTo achieve all that 1s possible, we must attempt the impossibl. Success does not depend on what you achieved but. on how you achieved itADVANCED FINANCIAL ACCOUNTING & REPORTING AFAR-03 Soll Problem t: 1. (¢)- 717,800 2. (¢)- 638,000 3. (a)~ 87,000 Free Assets Assets Pledged To Fully Secured Creditors: Land and Buildings Less: Mortgage Payable ... 500,000 Interest Payable...... P-90,000 Free Assets: CSP crore 61,400 Accounts Rec. (35% ‘x 250,000) 212,500 Invent. (340,000 — 50,000) vse 290,000 Prepaid expenses. 0 Machinery & Equipe 53,900 Goodwill........ oO Additional assets/unrecorded assets: Patent. 10.000 Total Free Assets.. sence meameneenene, ‘717,800 (1) P 3,400 16,400 Administrative Expenses. Net Free Assets. 638,000 (2) Unsecured Creditors Without Priortty: Asset Pledged to Partially Secured Creditors: P 110,000 P 160,000 Interest Payable......... ‘5,000 165,000 P 55,000 Unsecured Creditors without Priority: Accounts Payable......... P._ 670,000 Total Unsecured creditor Without Priotty.amucvarnue P-725,000 Estimated Deficiency to Unsecured Credltors-ruewmem (282.000 (3) Alternative Approach to determine Estimated Deficiency to Unsecured Creditors: Estimated (gain) loss on realization: ‘Accounts Receivable (230,000 ~ 212,500). Inventory (290,000 - 420,000). Prepaid expenses (0 ~ 40,000) Investments (120,000 - 180,000)... Land and Buildings (500,000 ~ 470,000) Machinery and equipment (53,900 - 220,000 ‘Goodwill (0 - 200,000). ‘Additional/unrecorded assets: Patent {10,000 ~0} ‘{20,000) Estimated net loss on asset realization (7) 583,600 ‘Add: Unrecorded Expenses: Taxes 16,400 10,000 Estimated liquidating expenses (administrative exp.) 60,000 __86,400 Estimated Net Loss.. . (8) 670,000 Less: Stockholder’s Equity. 583,000 Estimated Defclency to Unsecured Creditors (3) 97.090 4, (c)- 88% or P88 Estimated Settlement per peso of Unsecured Creditors Estimated Settlement per peso of Unsecured Creditors / Est’d. Recovery = Net Free Assets/Total Unsecured Creditors Percentage of Unsecured Creditors = P638,000/P725,000 = 88% or P.88 : PL AFAR-03SOLADVANCED FINANCIAL ACCOUNTING & REPORTING 5. (d); 6. (d); 7 (a) ~ $83,600; 8. ‘c) - 670,000; Problem IV Estate deficit, beginning AFAR-03 8012 Version 1 - Statement of Realization and Liquidation 373,600 ‘Assets Realized: Sales Price Fait Value (Galo) Loss Inventory 26,000 26,400 a0 ‘Accounts receivable 84,000 80,000 (4,000) Merchandise inventory 152,000 160,000 ho “ano Uquidated PSCreditors-Bank loan, 26,000 Unsecured Creditors w/ Priority Salaries and Wages ‘40,900 Taxes, 8000 49 ‘Administrative Expenses. <1 Estate Deficit, ending. 1440 _ Versi ement of Realization and Liquidation ‘Assets to be Realized: ~~ Vassets to be Realized: a 20,000 | investment inC/S 26,000 Mi 160.00} sk eos Investment in C/S 26400 | Mt 152/000 and 16000 ides. 60,500 | Assets Not Reaired: ‘Machinery and Eqpt. 48,000 Lane 100/000 lies con ‘assets Acquired 0 | Machinery and Eapt “an obitties Uquideted: Lables to be Uguideted: Bank toan 26,000 | Notes Payable 24000 Salaries and Wages ‘2,000 | Accounts Payable 288,000 Twas 1.000 | Solanes and Wages 40,000 | taxes Payatie re | Banktoans 180,000 abilities Not Liquideted | tiepiities incurred/Assumed: Notes Payable ‘Accounts Payable Bank Loans (180~ 26) ‘Supplementary Debits): ‘Administrative Expense Total and = ‘het Lox Statement of Realization and Liquidation ‘Assets tobe Realized: ‘Assets to be Realized: aR 20,000 | Investment in C/S 26,000 mi 16000, AR se000 Investment in C/S 26,400) MI 152,000 land 100,000 Bldgs 0,00 | Assets Not Reolied: ‘machinery and Eapt 19.000! Land 100,000 Bis 60,000 Acquired 0- | stachnery and Eap. 48,000 Assets Uobinies Liguideted: Unbtties tobe Liqudated: Sanktoan 26000 | totes Payable 244000 Salaries and Wages 40,000 | Accounts Payable zan000 tases 2.000 | Salviesand Wages 40,000 Administrative exp. — accrued 7.480 | Taxes Payable 8,000 Bank Loans 180,000 iquidated abies tncured/Assumed: abies Not Notes Payable 244,000 | Adminstratwe expenses 7440 ‘Accounts Payable 788,000 | Bank Loans (180-26) 25600 | on relizeton: once on reaction a (84,000 - 80,000) 400 Investment 400 Tots i AFAR-03SOL