Chapter 2- Corporate

Liquidation
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 When the financial position of the debtor is such that

it cannot resolve its financial difficulties, it will have
to resort to a liquidation.

Introduction
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 The basic focus = quitting concern

Accounting and Reporting  Statement of Affairs and Statement of Realization and
Liquidation must be prepared
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 Is a statement of financial condition that emphasizes liquidation

values and provides relevant information for the trustee in
liquidating the debtor corporation.
Statement of Affairs  Assets are measured at expected net realizable values and
classified on the basis of availability for fully secured, partially
secured, and unsecured creditor.
 Liabilities are classified as: priority, fully secured, partially
secured, and unsecured
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 CLASSIFICATION OF ASSETS
1. Assets Pledged to Fully Secured Creditors
2. Assets Pledged to Partially Secured Creditors
3. Free Assets

Statement of Affairs  CLASSIFICATION OF LIABILITIES

1. Unsecured Liabilities with Priority
2. Fully Secured Creditors
3. Partially Secured Creditors
4. Unsecured Liabilities without Priority
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 Is an activity statement that is intended to show

Statement of Realization progress toward the liquidation of a debtor’s estate.
and Liquidation  Reports the accomplishment of the trustee “receiver”
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 Prepared to accompany the statement of affairs to

Deficiency prove the deficiency to unsecured creditors.
Statement/Statement of  Shows causes of deficiency by summarizing losses
Estate Deficit and gains from realization and unrecorded
adjustments to assets and liabilities
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Reference

• Advanced Financial Accounting and Reporting (2019), by Antonio J. Dayag

Les Corporation is undergoing liquidation and has the following statement of financial 10
position as of January 1, 2020:

Assets Liabilities and SHE

Cash 114,200 Salaries payable 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 937,500 Total 937,500

• The mortgage payable is secured by the building having a realizable value of 360,000.

• Accounts payable amounting to 60,000 is secured by the receivables amounting to

85,200 which is collectible in the amount of 68,160.

• The balance in the book value of the receivables which has a realizable value of
235,000 is used to secure the loan payable.
• The inventory has a realizable value of 53,000. 11
• In addition to the recorded liabilities are liquidation expenses amounting to 9,500 and
taxes amounting to 4,000.

Compute for the following:

I. Estimated deficiency to unsecured creditors

II. Payment to partially secured creditors
III. Payment to unsecured creditors with priority
IV. Payment to unsecured creditors without priority