CORPORATE LIQUIDATION

PROCESS:

➢ Sell all non-cash assets at Net Realizable Value

➢ Pay the creditors
• Fully secured creditors
• Partially secured creditors
• Unsecured creditors with priority – liabilities legally required to be paid.
• Unsecured creditors without priority

FORMULAS
ASSETS TO BE REALIZED: LIABILITIES TO BE REALIZED
Assets Acquired P xxx Liabilities Assumed or Incurred P xxx
Liabilities Liquidated xxx Assets Realized xxx
Liabilities Not Liquidated xxx Assets Not Realized xxx
Supplemental Debt xxx Supplemental Credit xxx
Loss P xxx Gain P xxx

Net free assets P xxx

Divide: Total unsecured liabilities without priority xxx
Recovery Percentage P xxx

Assets Pledge to Fully Secured Liability P xxx

Less: Fully Secured Liability xxx
Assets Available for Unsecured Liabilities xxx
Add: Assets not Pledge xxx
Total Free Assets xxx
Less: Total Unsecured Liabilities with Priority xxx
Net Free Assets xxx
Less: Total Unsecured Creditors without Priority xxx
Estimated Deficiency to Unsecured Creditors xxx

Partially Secured Liability P xxx

Less: Assets Pledge to Partially Secured Liability xxx
Unsecured Portion xxx
Add: Unsecured Liabilities without Priority xxx
Total Unsecured Liabilities without Priority xxx
PROBLEM 1:

Pinnacle Corporation is undergoing liquidation and has the following statement of

financial position as of January 1, 2020:

Assets Liabilities and Equity

Cash P 114,200 Salaries P 50,000
Accounts receivable 340,800 Accounts payable 108,500
Inventory 80,000 Mortgage payable 400,000
Prepaid expenses 2,500 Loan payable 220,000
Building 345,000 Note payable 80,000
Goodwill 55,000 Ordinary shares 120,000
Deficit (41,000)
Total P 937,500 Total P 937,000

The mortgage payable is secured by the building having a realizable value of

P360,000. Account payable amounting to P60,000 is secured by the receivables
amounting to P85,200 which is collectible in the amount of P68,160. The balance in
the book value of the receivables which has a realizable value of P235,000 is used to
secure the loan payable. The inventory has a realizable value of P53,000.

Addition to the recorded liabilities are liquidation expenses amounting to P9,500 and
taxes amounting P4,000.

Compute the following:

a. Estimated deficiency to unsecured creditors. (P 41,640)

Accounts receivable (P68,160 + P235,00) P 303,160

Accounts payable, fully secured portion (60,000)
Loan payable (220,000)
Asset available for unsecured liabilities 23,160
Assets Not Pledge:
Cash 114,200
Inventory 53,000 167,200
Total free assets 190,360
Unsecured Liabilities with Priority
Salaries (50,000)
Liquidation expenses (9,500)
Tax payable (4,000) (63,500)
Net free assets P 126,860
Unsecured Liabilities without Priority
Accounts payable, unsecured portion
(P108,500 – 60,000) (48,500)
Mortgage payable, unsecured portion
(P400,000 – 360,000) (40,000)
Note payable (80,000) (168,500)
Estimated Deficiency to Unsecured Creditors (P 41,640)
b. Payment to partially secured creditors. P 390,116

Mortgage payable P 400,000

Building (360,000)
Unsecured Portion 40,000
Multiply: Recoverable percentage
of unsecured liabilities with priority* 75.29%
Recoverable amount of the unsecured portion 30,116
Secured portion 360,000
Payment to Partially Secured Creditors P 390,116

* Net free asset P 126,860

Divide: Total unsecured liabilities without priority 168,500
Recovery Percentage 75.29%

c. Payment to unsecured creditors with priority. P 63,500

Total unsecured liabilities with priority P 63,500

Multiply: Recoverable percentage of
unsecured creditors with priority 100%
Paid to Unsecured Creditors with Priority P 63,500

d. Payment to unsecured creditors without priority. P 96,747.65

Accounts payable, unsecured portion P 48,500

Notes payable 80,000
Total 128,500
Multiply: Recoverable percentage of
unsecured creditors without priority 75.29%
Paid to Unsecured Creditors with Priority P 96,747.65