AFAR CORPORATE LIQUIDATION

STRAIGHT PROBLEMS

Problem 1: The Statement of Affairs

The following information is available on June 10, 2020, Cash P 25,600
for TOWN and COUNTRY COMPANY, which is having Accounts receivable 51,200
difficulty in paying its liabilities as they become due: Inventories 230,400
Land 128,000
Carrying Amount
Buildings, net 640,000
Cash P 11,469
Intangible assets 166,400
Accounts receivable, net, fair value
Total P1,241,600
equal to carrying amount 131,891
Accounts payable P 320,000
Inventories, current fair value ,
Notes payable 256,000
P51,610 pledged on P60,211 of notes
Deferred revenue 6,400
payable 111,821
Wages payable 19,200
Machinery and equipment, net,
Mortgage note payable 512,000
current fair value of P193,250
Capital stock 256,000
pledged on mortgage note payable 306,791
Retained earnings, deficit (128,000)
Office supplies, current fair value of
Total P1,241,600
P7,168 5,734
Wages payable 16,630
Additional information:
Taxes payable 3,441
1. The land and the buildings are pledged as security for
Accounts payable 172,032
the mortgage payable.
Notes payable, P60,211 of which is
2. In June, 2020, SAN PEDRO received P6,400 from a
secured by inventories 114,688
customer as payment in advance for merchandise that
Mortgage note payable 144,507
is no longer marketed and thus can no longer be
Common stock, P10 par 286,720
provided.
Retained earnings, deficit 170,312
3. Activities of the trustee during June are summarized as
follows:
a. P46,080 is collected on the receivables.
b. Inventories are sold for P124,160.
Additional information:
c. Land and buildings bring total of P640,000.
(1) Estimated liability to the trustee is P74,547.
d. Nothing is realized from the intangible assets.
(2) A delivery van previously given to the supervisor was
e. Administrative expenses of P52,480 are incurred
returned to the company, fair market value, P71,680.
by the trustee.
REQUIRED: REQUIRED:
a. Prepare a statement of affairs as of June 10, 2020. 1. Prepare journal entries in the books of the trustee and
b. Compute the estimated recoverable amounts to the in the books of the distressed company for the above
different types of creditors in the event of liquidation. transactions.
c. Prepare a statement of deficiency to unsecured 2. Prepare a statement of realization and liquidation using
creditors at June 10, 2020. the conventional method..
3. Discuss briefly and illustrate how the realization of
Problem 2: Estate Accounting
non-cash asset is accounted for under the book value
The balance sheet of SAN PEDRO ENTERPRISES at July 31,
method.
2020 follows. At this date an interim trustee was appointed
by the court to assume control of SAN PEDRO’s estate and
liquidate the distressed corporation.

MULTIPLE CHOICE

The following were taken from the statement of affairs of P56,000)

GREENFIELD COMPANY. Assets (pledged against debts of 40,000
Assets pledged with fully secured P56,800 P104,000)
creditors Other assets 64,000
Assets pledged with partially secured 10,000 Liabilities with priority 33,600
creditors Unsecured creditors 160,000
Free assets 8,800 2. In the event of liquidation at this point, how much is
Preferred creditors 2,400 the estimated amount recoverable by partially-secured
Fully secured creditors 55,200 creditors?
Partially secured creditors 16,000 a. P104,000 c. P 59,200
Unsecured creditors without priority 14,400 b. P 40,000 d. P160,000
1. The estimated deficiency to unsecured creditors is
a. P 4,000 c. P12,400 The summarized Statement of Realization and Liquidation
b. P10,000 d. P11,600 for BLUEFACE CORPORATION for 2020 follows:.
Assets to be P48,000 Liabilities P40,000
YELLOW-LEG, INC. has had severe financial difficulties and realized assumed
is considering the possibility of liquidation. At this time, Assets 32,000 Liabilities not 52,000
the distressed company has the following assets (stated at acquired liquidated
net realizable value) and liabilities: Assets realized 44,000 Supplementary 88,000
Assets (pledged against debts of P 92,800 credits

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 Liabilities to be 5. What is the estimated payment to all creditors?
liquidated 64,000 a. P 131,200 c. P 152,000
Retained earnings decreased by P9,600 during the year. b. P 275,520 d. P 232,000
The ending balances of ordinary shares and retained
earnings are P80,000 and P(60,000), respectively. 6. Calculate the estimated total amount recoverable on the
3. The beginning balance of cash is notes payable.
a. P45,600 c. P60,000 a. P 57,664 c. P 18,176
b. P 84,800 d. P 62,784
b. P52,000 d. P44,800
BROWN RED, INC. a closely-held corporation was undergoing
The following information is available concerning KELSO liquidation. The total cash value of BROWN RED’s bankruptcy
INC. on the date the company entered bankruptcy estate after the sale of all assets and payment of
proceedings: administrative expenses is P192,000.

Account Balance per Books BROWN RED has the following creditors:
Cash P2,929 • Fracon Bank is owed P96,000 on a mortgage loan secured
Accounts receivable 53,514 by BROWN RED’s real property. The property was valued
Inventory 28,672 at and sold, in bankruptcy, for P89,600.
Prepaid expenses 440 • The BUREAU of INTERNAL REVENUE has a P15,360
recorded judgment for unpaid corporate income tax.
Buildings, net 52,416
• JOG Office Supplies has an unsecured claim of P3,840
Equipment, net 13,734
that was timely filed.
Goodwill 5,786
• Nanstar Electric Company has an unsecured claim of
Wages payable (6,560) P12,800 that was timely filed.
Taxes payable (5,854) • Liquid Corporation is owed P64,000 in a loan contract
Accounts payable (40,408) secured by BROWN RED’s notes receivable which realized
Notes payable (24,000) P76,800.
Common stock (97,730) • Decoy Publications has a claim of P20,480, which is
Retained earnings, Deficit 17,061 secured by BROWN RED’s inventory that was valued and
sold, in bankruptcy, for P2,560. The claim was timely
The inventory secures the notes payable. filed.
Administrative and liquidation expenses are estimated
at P53,805. 7. Calculate the total amount recoverable by partially-
Expected realizable values of the assets are: secured creditors:
Accounts receivable P45,158 a. P0 c. P 104,320
b. P8,320 d. P 15,360
Inventory 18,944
Buildings 44,128
8. Calculate the total amount recoverable by unsecured
Equipment 10,374
creditors with priority:
4. Calculate the estimated amount recoverable by the a. P 64,000 c. P 104,320
holders of the notes payable in the event of b. P 8,320 d. P 15,360
liquidation.
a. P 22,269 c. P 18,942 9. Calculate the total amount recoverable by fully secured
b. P 21,498 d. P 22,989 creditors:
a. P 64,000 c. P104,320
Items 5 and 6 are based on the following: b. P 4,160 d. P 15,360
Because of inability to pay its debts, the MINOR BLUE
MANUFACTURING COMPANY has been forced into bankruptcy 10. Calculate the total amount recoverable by unsecured
as of April 30, 2020. The balance sheet on that date shows: creditors without priority:
ASSETS a. P0 c. P11,520
Cash P 3,456 b. P8,320 d. P 15,360
Accounts Receivable 50,368
Notes Receivable 23,680 CLARET CORPORATION, a financially distressed company, is
Inventories 112,448 to be liquidated and has the following liabilities:
Prepaid expenses 1,216 Income taxes P 12,800
Land and building 78,400 Notes payable, secured by land 192,000
Equipment 62,464 Accounts payable 132,800
P 332,032 Salary payable, evenly to two employees 9,600
LIABILITIES Bonds payable 112,000
Accounts payable P 67,200 Administrative expenses for liquidation 32,000
Notes payable 84,800
Accrued wages 2,368
Accrued taxes 5,952 The said company has the following assets:
Mortgage bond payable 115,200
Common stock – P20 par 96,000 Book value Fair value
Retained earnings (39,488) Current assets P 102,400 P 54,080
P 332,032 Land 128,000 144,000
Additional information: Building and equipment 128,000 176,000
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. 11. How much will the holders of notes payable collect
b. Inventories are expected to bring in P72,160 when sold following the liquidation?
under bankruptcy condition. a. P172,800 c. P132,800
c. Land and buildings have an appraised value of 152,000. b. P144,000 d. P192,000
they serve as security on the bonds.
d. The current value of the equipment, net of disposal cost The LEMON COMPANY has the following data in connection
is P14,400. with its bankruptcy petition with the Securities and Exchange
Commission at the end of 2020.

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 Assets:
Liabilities without priority P 368,000 To be realized P1,760,000
Liabilities with priority 176,000 Acquired 960,000
Realized 1,536,000
Secured liabilities Not realized 1,760,000
Debt 1, P336,000; value of pledged asset P 288,000 Liabilities:
Debt 2, P272,00, value of pledged asset P 160,000 Liquidated 2,400,000
Debt 3, P192,000, value of pledged asset P 224,000 Not liquidated 2,176,000
To be liquidated 2,880,000
The company also has a number of other assets that are not Assumed 2,080,000
pledged in any way. The creditors holding Debt 2 want to Supplementary:
receive at least P227,200. Charges 4,000,000
12. For how much do these free assets have to be sold so Credits 3,744,000
that Debt 2 would receive exactly P227,200?
a. P 492,800 c. P544,000
b. P 316,800 d. P460,800 13. The net gain (loss) for the five-month period is:
a. P(416,000) c. P 544,000
MELSIMS HATCH, INC. is undergoing liquidation since August b. P 320,000 d. P 704,000
1, 2020. Five months later, on December 31, 2020, its
condensed realization and liquidation statement shows the
following:

PROBLEM I STATEMENT OF AFFAIRS – TOWN

and COUNTRY
Book Value Assets Est. RV Est. AA Gain( Loss)
Pledged with FSC:
306,791 Machinery and equipment 193,250 (113,541)
Less Mortgage note payable 144,507 48,743

Pledged with PSC:

111,821 Inventories (deducted contra) 51,610 - (60,211)
Free Assets:
11,469 Cash 11,469 11,469 -
131,891 Accounts receivable 131,891 131,891 -
5,734 Office supplies 7,168 7,168 1,434
- Delivery van 71,680 71,680 71,680
Estimated Net Loss ( 100,638)
Estimated Total Amount for Unsecured Creditors 270,951
Less: claims with priority (see contra) 94,618
Estimated net amount for claims w/o priority 176,333
Estimated deficiency to claims w/o priority 58,777
567,706 235,110

Unsecured
Book Value Liabilities Amount
Fully secured claims (FSC):
144,507 Mortgage note payable (deducted contra) 180,634
Unsecured claims with priority (ded. contra):
16,630 Wages payable 20,787
3,441 Taxes Payable 4,301
- Estimated Liability to Trustee 93,184 118,272
Partially secured claims (PSC:
60,211 Notes payable 75,264
Less: Realizable value of
Inventories (64,512) 10,752
Unsecured claims without priority:
54,477 Notes payable 68,096
172,032 Accounts Payable 215,040 283,136

Stockholders’ Equity
286,720 Capital Stock
(170,312) Retained Earnings (Deficit)

567,706 235,110

Problem 2 (a) ESTATE ACCOUNTING – Journal entries

BOOKS OF TRUSTEE

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 BOOKS OF SB ENTERPRISES
Cash 25,600 Trustee Account 128,000
Accounts Receivable 51,200 Accounts Payable 320,000
Notes
Inventories 230,400 Payable 256,000
Land 128,000 Deferred Revenue 6,400
Buildings 640,000 Wages Payable 19,200
Intangible Assets 166,400 Mortgage Note Payable 512,000
Accounts Payable 320,000 Cash 25,600
Notes Payable 256,000 Accounts Receivable 51,200

Deferred Revenue 6,400 Inventories 230,400

Wages Payable 19,200 Land 128,000
Mortgage Note Payable 512,000 Building 640,000
Estate Equity 128,000 Intangible Assets 166,400

Cash 810,240 Retained Earnings 458.240

Estate
Equity 458,240 Trustee Account 458,240
Accounts Receivable 51,200
Inventories 230,400
Land 128,000
Bldgs 640,000
Intangible Assets 166,400
Payable to Trustee 52,480

Mortgage Note Payable 512,000 No Entry

Deferred Revenue 6,400
Wages Payable 19,200
Payable to Trustee 52,480
Cash 590,080

Accounts Payable 136,534 No Entry

Notes Payable 109,226
Cash 245,760

Capital
Accounts Payable 183,466 Stock 256,000
Notes Payable 146,774 Trustee Account 330,240
Estate Equity 300,240 Retained Earnings 586,240

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

ASSETS
To be Realized: Realized:
Accounts Receivable 51,200 Accounts Receivable 46,080

Inventories 230,400 Inventories 124,160

Land 128,000 Land & Bldgs. 640,000
Buildings 640,000
Intangible Assets 166,400
Total 1,216,000 Total 810,240

Acquired: - Not Realized -

LIABILITIES
Liquidated: To be Liquidated:
Accounts Payable 136,534 Accounts Payable 320,000
Notes Payable 109,226 Notes Payable 256,000
Deferred Revenue 6,400 Deferred Revenue 6,400
Wages Payable 19,200 Wages Payable 19,200
Mortgage Note Payable 512,000 Mortgage Note Payable 512,000
Payable to Trustee 52,480
Total 835,840 Total 1,113,600

Not Liquidated: Assumed:

Accounts Payable 183,466 Payable to Trustee 52,480
Notes Payable 146,744
Total 330,240 Total 52,480

REVENUES & EXPENSES

supplementary
Charges Supplementary Credits
Liquidation Expenses 52,480 -

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 Total 52,480 - Total

Total Total
Debits 2,434,560 1,976,320 Credits
458,240 Net Loss
2,434,560 2,434,560
SUPPLEMENTARY SCHEDULES:
Cash CAPITAL STOCK RETAINED EARNINGS
32,000 737,600
1,012,800 307,200 320,000 128,000
458,240

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