GROUP 2

CHAPTER 5
CORPORATE
LIQUIDATION AND
REORGANIZATION
 INSOLVENCY MAY BE ETHIER:

Voluntary Involuntary
the insolvent three or more
corporation creditors of the
voluntarily insolvent
applies petition corporation file a
to a court of petition to a court
law to be of law for the
discharged adjudication of
from its the corporation as
liabilities. insolvent.
 LIQUIDATION
I S THE TERMI NATI O N O F B U S I N E S S
OPERATI ONS O R THE WI N DI N G U P O F
AF F AI R S.

REORGANIZATION
I T I S T HE I M P L EMENTATI O N O F A
BUS I N ESS PL AN TO RES TR U CT U R E O R
R EH ABI L I TATE A C O RP O R AT I O N W I T H
THE H OPE O F I NC REAS I N G CO MPAN Y
VAL UE.
Measurement basis

ASS ET
Re a l i z a bl e v a l ue
LI ABI LI TI ES
Ex p ect ed net s e t t l e me n t

Financial Reports

1 . STATEMENT O F AF F AI RS

2 . STATEME N T O F R EAL IZ A TIO N A N D

LI QUI DATI O N
 STATEMENT OF
AFFAIRS
SHOWS THE F I NANC I AL P O S I T I O N O F A
L I QUI DATI NG ENTI TY. THE AS S E T S T H AT AR E
AVAI L ABL E FO R S AL E, THE CL AI M S O F
CREDI TORSTO BE S ETTL ED AN D T H E CL AI M S
OF THE OWNERS .
 ASSETS ARE
CLASSIFIED
INTO:

ASSETS PLEDGED TO FULLY ASSETS PLEDGED TO PARTIALLY FREE ASSETS

SECURED CERITORS SECURED CREDITORS

-these are assets with -these are assets

-these are assets with
realizable values equal to realizable values less than the that have not
or greater than the expected net settlement pledged as security.
expected net settlement amount of the related liabilities.
amount of the related
liabilities.
 Liabilities are
classified into:
1 UNS ECURED L I AB I L I T I ES WITH P RIO RITY
t he se a r e l i a bi l i t i e s t ha t , a l tho ugh n o t
s e cur ed by a n y a s se t , a r e ma n da te d b y la w to
be paid first.

2 F ULLY SECUR ED CR ED I TO RS
t he se a r e l i a bi l i t i e s s e cur e d b y a sse t wi th
s uf f i ci e nt r ea li z a b l e v a lue .

PAR TI ALLY S ECU R ED CRE D ITO RS

3
t he se a r e l i a bi l i t i e s s e cur e d b y a sse ts wi th
s uf f i ci e nt r ea li z a b l e v a lue s.
UNS ECURED L I AB I L I T I ES WITH O U T
4
PR I ORI TY
a l l ot her l i a bi li t i e s n o t cl a ssi f i e d un de r 1 , 2
and 3
ILLUSTRATION: STATEMENT OF AFFAIRS
ABC CO. HAS FILED FOR VOLUNTARY INSOLVENCY AND IS GOING TO LIQUIDATE. ABC'S STATEMENT OF FINANCIAL POSITION PRIOR TO THE LIQUIDATION PROCESS
IS SHOWN BELOW:

ABC CO.
STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 20X0
ASSETS
CURRENT ASSETS:
CASH 40,000
ACCOUNTS RECEIVABLE 220,000
NOTE RECEIVABLE 100,000
INVENTORY 530,000
PREPAID ASSETS 10,000
900,000
NONCURRENT ASSETS:
LAND 500,000
BUILDING, NET 2,000,000
EQUIPMENT, NET 300,000
2,800,000
TOTAL ASSETS 3,700,000
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
ACCRUED EXPENSES 221,000
CURRENT TAX PAYABLE 350,000
ACCOUNTS PAYABLE 1,000,000
1,571,000
NONCURRENT LIABILITIES
NOTE PAYABLE (SECURED BY EQUIPMENT) 300,000
LOAN PAYABLE ( SECURED BY LAND AND BUILDING 2,000,000
2,300,000

CAPITAL DEFICIENCY:
SHARE CAPITAL 500,000
RETAINED EARNINGS ( DEFICIT) (671,000)
(171,000)
TOTAL LIABILITIES AND EQUITY 3,700,000
Additional information:

The following were determined before the start of the liquidation process:
a. Only 76% of the accounts receivable is collectible.
b.P10,000 interest is receivable on the note.
c. The inventory has an estimated selling price of P420,000 and estimated costs to sell of
P10,000.
d . The prepaid assets are non-refundable.
e. The land and building have fair values of P2,000,000 and P800,000, respectively, but ABC
Co. expects to sell both assets at a package price of P2,600,000.
f. The equipment has an estimated net selling price of P200,000
g. Administrative expenses of P30,000 are expected to be incurred in the liquidation process.
h. The accrued expenses include accrued salaries of P25,000.
i. P15,000 interest is payable on the loan
j. All the other liabilities are stated at their expected settlement amounts.
Requirement: Prepare the statement of affairs as of January 1, 20x1.
Step 1: Restate the assets
and liabilities
Step 2: Identify the classifications
of the assets and liabilities
Step 3: (Optional) Estimated
recovery percentage

The computation of the estimated recovery of the partially secured creditors is

elaborated below:

Partially secured creditors 300,000

Less: Realizable value of collateral security - equipment 200,000
Unsecured portion of claim 100,000
Multiply by: Estimated recovery percentage 70%
Total 70,000
Add back: Realizable value of collateral security Estimated recovery 200,000
Estimated recovery 270,000
 Step 4:
Statement of
affairs
 STATEMENT OF
REALIZATION AND
LIQUIDATION
-Administer by a receiver/trustee
-Is an activity statement thatis intended to show
progress,i.e., actual transactions toward the liquidation
of a debtor's estate.
-Its original purpose is to inform the bankruptcy court
and interested creditors of the accomplishments of the
trustee.

Three Major sections in StatemenRealization and

Liquidation
Assets
Liabilities
Supplementary Items
 LIQUIDATION
THE S TATEME N T OF REA LI Z A TI O N A ND
LI QUI DATI O N I S DE PI C T ED LI K E A T-A CCO UNT .

Debits Credits

Assets to be realized Assets realized

assets acquired Assets not realized

liabilities liquidated Liabilities to be liquidated

liabilities not liquidated Liabilities assumed

supplementary expense Supplementary income

* Th e d i f f eren c e between t h e d eb i t s a n d cred i t s in the T-

account wi l l rep res en ts t h e n et ga i n a n d l os s on the sa l e o f
assets and settl emen t of l i a b i l i t i es d uri n g t h e per io d .
 ILLUSTRATIVE EXAMPLE
ABC C o. i s g o i n g t o l i qui da te . A re ce i v e r/ truste e w i l l a d mi ni st e r t h e
l i qui da t i on. ABC ’ S f i n a n ci a l p o si ti o n o n J a n .1 , 2 0 x 1, b e f o r e t h e s t a r t o f t h e
l i qui da t i on pr o ce ss, i s summa ri z e d b e lo w:

Additional information on Jan.1, 20x1

a. 10,000 interest is receivable on the note and 15,000 interest is payable on the loan.
Administrative expenses of 30,000 are expected to be incurred in the liquidation process.
Transactions occurred during the period are as follows;
a. Only 165,000 were collected on the accounts receivable. The remainder
was written-off.
b. The interest on the note was collected in full, but only 90% was collected

1
on the principal. The remainder was written-off.
c. Half of the inventory was sold for 300,000. Actual costs to sell were
5,000.
d. The prepaid assets were written-off.
e. The land and building were sold for 2,600,000.
f. The equipment was sold for 220,000.
g. Of the total accrued expenses, only the accrued salaries of 25,000 were
paid. The balance remains outstanding.
h. The current tax payable was paid in full.
i. The interest and the principal on the loan were paid in full.
j. The note payable was settled for 220,000. The lender cancelled the
balance.
k. Administrative expense of 27,000 were paid.
 REQUIREMENTS

A. Pr ovi de t he f o l l o w i ng j our nal e nt r i e s i n

t he b ooks of t he r e c e i v e r
I . Ope ni ng j ou r na l e nt r y
I I . “ Ne w” ass e t s a nd l i a bi l i t i e s
I I I . Tr ansac t i o ns du r i ng t he y e ar
B. Pr e par e t he S t a t e me n t of Re al i zat i on and
Li q ui d at i on
C. Comput e f o r t he ne t gai n and ne t l os s .
D. Comput e f o r t he e nding b al ance of cas h.
E. Comput e f o r t he e ndi ng b al ance of e s t at e
de f i c i t ac c ount a nd ma k e r e conci l i at i on for
t he c omput e d c a s h ba l a n ce .
 SOLUTI ONS

A.
 SOLUTI ONS

B.
SOLUTI ONS
Add i t i onal i l l us tra ti on :
I l l ustrati on 1: Rec ov ery of cl a i ms b y ord er of pri o r ity
Sol ut i o n:
I l l ustrati on 5: E rrors
ABC Co. has voluntarily filed a petition for bankruptcy. ABC's
inexperienced accountant determined that the expected recovery
percentage of unsecured creditors without priority is 20%. The
unsecured creditors have refuted this and demanded an audit of
the accountant's computations. The following information was
determined from the accountant's working papers:
I l l ustrati on 5: E rrors
•During the period, assets with total book value of P1,000,000
were sold for P940,000. A portion of the proceeds were used to
settle 'fully secured liabilities' of P540,000 and ' partially secured
liabilities' of P370,000.
I l l ustrati on 5: E rrors
I l l ustrati on 5: E rrors
I l l ustrati on 5:E rrors
I l l ustrati on 5:E rrors
I l l ustrati on 6: Rec ei v ers hi p-j ourn a l en t ry
I l l ustrati on 6: Rec ei v ers hi p-j ourn a l en t ry
I l l ustrati on 6: Rec ei v ers hi p-j ourn a l en t ry
REORGANIZATION

R eorg ani z ati on i s th e i mpl emen t a t i on of

a b usi n ess pl a n to res truct ure or
r ehabi l i tate a c orp ora ti on wi t h t h e h opes
of i ncreasi ng c omp a n y va l ue. I n mos t
cases, org an i z a ti on i n v o l v es ch a n gi n g
t he e nti ty' s c a p i ta l s truct ure.
Types of Corporate Reorganization

a . Gr oup Reor g a n i z a t i o n
own er shi p wi t hi n a g r o up o f co mp a n i e s
cha ng es due t o n e w a cqui si ti o n s ,
f or ma t i on of n e w ho ld i n g co mp a n y, b uy
out s, t a ke ov e r s, r e v e r se a cq ui s i ti o n s ,
di s p os a l of su b si d i a r i e s, d e me rge rs , a n d
ot her f or ms o f cha n g e s a nd o wn e rs hi p .
Types of Corporate Reorganization

b . Reca pi t a li z a t i o n
r e f e r s t o t he cha n g e i n t he ca p i ta l
s t r uct ur e t hr oug h t he r e p l a ce me n t o f o l d
s ha r es wi t h n e w sha r e s
Types of Corporate Reorganization

c. Qua si - r eor g a n i z a t i o n
a n a ccount i n g p r o ce d ur e whe re b y a
f i n a nci a ll y t r a v e le d co r p ora ti o n re v a lue s
i t s a s set s a nd li a b i li t i e s a n d re a li gn i n g i ts
e qui t y, s ubj e ct t o t he p r ov i si o n s o f
r e l e v a nt r eg ul a t i o n s, i n o rde r to e s ta b li s h
a " f r esh s t a r t " i n a cco un t i n g se n s e .
Types of Corporate Reorganization

d. Cor por a t e r e ha b i l i t a t i o n
a p r oces s wh e r e b y a f i n a n ci a l ly tro ub le d
cor por a t i on i s a d mi n i st e r e d b y a n o the r
p a r t y a nd or de r t o t r y t o b ri n g b a ck the
cor por a t i on t o i t s f o r me r f i n a n ci a l
con di t i on.
Types of Corporate Reorganization

e . Tr oubled d e b t r e st r uct u ri n g
i n v ol v es t he se t t le me n t of o b li ga ti o n a t
ot her t ha n t h e o r i g i n a lly a gre e d me tho d o f
s e t t l e ment .