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Chapter 5 corpo afar millan
Accounting (University of Manila)
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Chapter 5
Corporate Liquidation and Reorganization
PROBLEM 5-1: THEORY
1. D
6.
2. D
7.
3. A
8.
4. D
9.
5. D
10.
D
E
B
A
C
PROBLEM 5-2: THEORY & COMPUTATIONAL
1.
Solutions:
Requirement (a):
Assets pledged to fully secured creditors:
Land
Loan payable
Available for unsecured creditors
1,300,000
(750,000)
550,000
Assets pledged to partially secured creditors:
Equipment - net
Notes payable
Available for unsecured creditors
150,000
(500,000)
-
Free assets:
Excess of land over loan payable
Cash
Accounts receivable
Total free assets
Unsecured liabilities with priority:
550,000
200,000
450,000
1,200,000
Administrative expenses
(180,000)
Salaries payable
Net free assets
(800,000)
220,000
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Requirement (b):
Unsecured liabilities with priority:
Administrative expenses
Salaries payable
180,000
800,000
980,000
Fully secured creditors:
Loan payable
750,000
Partially secured creditors:
Notes payable
500,000
Unsecured liabilities without priority:
Notes payable - excess
Accounts payable
350,000
700,000
1,050,000
Requirement (c):
Total realizable value of assets
2,100,000
Less: Unsecured liabilities with priority
Salaries
Administrative expenses
(800,000)
(180,000)
(980,000)
Less: Fully secured liabilities
Loan payable
(750,000)
Less: Secured portion of partially secured
Liabilities
Notes payable (fair value of equipment)
(150,000)
Excess available to unsecured liabilities
without priority (Net free assets)
Less: Unsecured liabilities without priority
Notes payable - excess over fair value
of
equipment (500K - 150K)
Accounts payable
220,000
(350,000)
(700,000)
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Estimated deficiency to unsecured nonpriority creditors
(830,000)
Requirement (d):
Estimated recovery
percentage of unsecured
creditors without priority
=
Net free assets
Total unsecured
liabilities without priority
= 220,000 ÷ 1,050,000 (see requirement ‘b’) = 20.95%
Requirement (e):
500,000 x 20.95% = 104,761.90
Requirement (f):
BYE-BYE CORPORATION
STATEMENT OF AFFAIRS
AS OF JANUARY 1, 20X1
Book
values
1,000,000
600,000
200,000
500,000
2,300,000
ASSETS
Assets pledged to fully
secured creditors:
Land
Loan payable
Assets pledged to
partially secured
creditors:
Equipment - net
Notes payable
Free assets:
Cash
Accounts receivable
Total free assets
Less: Unsecured liabilities
with priority (see below)
Net free assets
Estimated deficiency
(squeeze)
Totals
Realizabl
e values
Available
for
unsecured
creditors
1,300,000
(750,000)
550,000
150,000
(500,000)
-
200,000
450,000
650,000
1,200,000
(980,000)
220,000
830,000
1,050,000
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Book
values
800,000
LIABILITIES
Unsecured liabilities with
priority:
Administrative expenses
Salaries payable
750,000
Fully secured creditors:
Loan payable
500,000
Partially secured
creditors:
Notes payable
Equipment - net
700,000
Unsecured creditors:
Accounts payable
(450,000)
2,300,000
Shareholders' equity
Totals
Realizabl
e values
Unsecured
non-priority
liabilities
180,000
800,000
-
750,000
-
500,000
(150,000)
350,000
700,000
700,000
-
1,050,000
2.
A
3.
A
4.
D
5.
C - Classes 1 through 6 have higher priority than Class 7.
PROBLEM 5-3: EXERCISES
EXERCISE 1:
Solutions:
Requirement (a):
Assets pledged to fully secured creditors:
Building - net
Mortgage payable
Available for unsecured creditors
1,000,000
(700,000)
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300,000
Assets pledged to partially secured creditors:
Machinery - net
Short-term bank loan
Available for unsecured creditors
300,000
(500,000)
-
Free assets:
Excess of building over mortgage payable
Cash
Accounts receivable
Inventories
300,000
100,000
500,000
500,000
Total free assets
Unsecured liabilities with priority:
1,400,000
Legal and other fees
(60,000)
Income tax payable
(1,000,000)
Net free assets
340,000
Requirement (b):
Unsecured liabilities with priority:
Legal and other fees
60,000
Income tax payable
1,000,000
1,060,000
Fully secured creditors:
Mortgage payable
700,000
Partially secured creditors:
Short-term bank loan
500,000
Unsecured creditors without priority
Short-term bank loan - excess
200,000
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Accrued payables
300,000
Accounts payable
700,000
1,200,000
Requirement (c):
Total realizable value of assets
2,400,000
Less: Unsecured liabilities with priority
Income tax payable
Legal and other fees
(1,000,000)
(60,000)
Less: Fully secured liabilities
Mortgage payable
(1,060,000)
(700,000)
Less: Secured portion of partially secured
liabilities
Short-term bank loan (fair value of
machinery)
(300,000)
Excess available to unsecured liabilities
without priority (Net free assets)
Less: Unsecured liabilities without priority
Accrued payables
Accounts payable
Short-term bank loan - excess (500K 300K)
Estimated deficiency to unsecured
non-priority creditors
340,000
(300,000)
(700,000)
(200,000)
(1,200,000)
(860,000)
Requirement (d):
Estimated recovery
percentage of unsecured
creditors without priority
=
Net free assets
Total unsecured
liabilities without priority
= 340,000 ÷ 1,200,000 (see requirement ‘b’) = 28.33%
Requirement (e):
100,000 x 28.33% = 28,330
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Requirement (f):
None.
Requirement (g):
GONE CORPORATION
STATEMENT OF AFFAIRS
AS OF JANUARY 1, 20X1
Book values
800,000
600,000
100,000
600,000
900,000
3,000,000
Book values
1,000,000
700,000
500,000
Realizabl
ASSETS
e values
Assets pledged to fully secured
creditors:
Building - net
1,000,000
Mortgage payable
(700,000)
Assets pledged to partially
secured creditors:
Machinery - net
300,000
Short-term bank loan
(500,000)
Free assets:
Cash
100,000
Accounts receivable
500,000
Inventories
500,000
Total free assets
Less: Unsecured liabilities with
priority (see below)
Net free assets
Estimated deficiency (squeeze)
Totals
Realizabl
LIABILITIES
e values
Unsecured liabilities with
priority:
Legal and other fees
Income tax payable
60,000
1,000,000
Available for
unsecured
creditors
300,000
-
1,100,000
1,400,000
(1,060,000)
340,000
860,000
1,200,000
Unsecured
non-priority
liabilities
-
Fully secured creditors:
Mortgage payable
700,000
-
Partially secured creditors:
Short-term bank loan
500,000
Machinery - net
(300,000)
200,000
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300,000
700,000
(200,000)
3,000,000
Unsecured
creditors:
Accrued payables
Accounts payable
300,000
700,000
Shareholders'
equity
Totals
-
1,000,000
1,200,000
EXERCISE 2:
1. Solution:
Realizable
value
Assets pledged to fully
secured creditors
Fully secured creditors
Available for unsecured
creditors
370,000
(260,000)
110,000
Free assets
Total free assets
Liabilities with priority
Net free assets
2.
320,000
430,000
(70,000)
360,000
Solution:
Partially secured creditors
Assets pledged with
partially secured creditors
Secured and
Priority claims
200,000
Unsecured liabilities
without priority
(120,000)
80,000
Unsecured creditors
Total unsecured liabilities
without priority
540,000
620,000
Net free assets
Divide by: Total unsecured liabilities without
priority
Recovery percentage
3. Solution:
Assets pledged with partially secured creditors
Partially secured creditors
360,000
620,000
58.06%
120,000
200,000
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Assets pledged with partially secured creditors
Excess to be paid from net free assets
Multiply by: Recovery percentage
Total amount paid to partially secured
creditors
4. Solution:
Unsecured creditors
Multiply by: Recovery percentage
Amount paid to unsecured creditors
(120,000
)
80,000
58.06%
46,448
166,448
540,000
58.06%
313,524
PROBLEM 5-4: CLASSROOM ACTIVITY
Solutions:
Requirement (a):
Assets pledged to fully secured creditors:
Building - net
Notes payable
Available for unsecured creditors
1,300,000
(700,000)
600,000
Assets pledged to partially secured creditors:
Inventories
Short-term bank loan
300,000
(500,000)
Available for unsecured creditors
-
Free assets:
Excess of building over loan payable
Cash
Total free assets
Unsecured liabilities with priority:
600,000
200,000
800,000
Net defined benefit liability
(600,000)
Legal and other fees
Net free assets
(100,000)
100,000
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Requirement (b):
Unsecured liabilities with priority:
Net defined benefit liability
600,000
Legal and other fees
100,000
700,000
Fully secured creditors:
Notes payable
700,000
Partially secured creditors:
Short-term bank loan
500,000
Unsecured creditors without priority:
Short-term bank loan - excess (500K - 300K)
200,000
Accounts payable
300,000
500,000
Requirement (c):
Total realizable value of assets
1,800,000
Less: Unsecured liabilities with priority
Net defined benefit liability
(600,000
)
Legal and other fees
(100,000
)
(700,000)
Less: Fully secured liabilities
Notes payable
(700,000)
Less: Secured portion of partially secured
liabilities
Short-term bank loan (fair value of inventories)
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(300,000)
Excess available to unsecured liabilities without
priority (Net free assets)
100,000
Less: Unsecured liabilities without priority
Short-term bank loan - excess over fair value of
inventories (500K - 300K)
(200,000)
Accounts payable
(300,000)
Estimated deficiency to unsecured nonpriority creditors
(400,000)
Requirement (d):
Estimated recovery
percentage of unsecured
creditors without priority
=
Net free assets
Total unsecured
liabilities without priority
= 100,000 ÷ 500,000 (see requirement ‘b’) = 20%
Requirement (e):
Amount
of claim
Estimated
recovery %
Estimated
recovery
Unsecured liabilities with
priority:
Net defined benefit liability
Legal and other fees
600,000
100,000
100%
100%
600,000
100,000
Fully secured creditors:
Notes payable
700,000
100%
700,000
Partially secured
creditors:
Short-term bank loan (fair
value of inventories)
Excess - unsecured portion
Total
300,000
200,000
500,000
100%
300,000
20%
40,000
340,000
Unsecured creditors
without priority:
Accounts payable
300,000
20%
60,000
Shareholders' equity
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Share capital
1,000,000
0%
Total realizable value of
assets
-
1,800,000
Requirement (f):
FIREWOOD CORPORATION
STATEMENT OF AFFAIRS
AS OF JANUARY 1, 20X1
Book
values
800,000
450,000
200,000
100,000
1,550,000
Book
values
ASSETS
Assets pledged to fully
secured creditors:
Building - net
Notes payable
Realizabl
e values
Available
for
unsecured
creditors
1,300,000
(700,000)
600,000
Assets pledged to
partially secured
creditors:
Inventories
Short-term bank loan
300,000
(500,000)
-
Free assets:
Cash
Prepaid assets
Total free assets
Less: Unsecured liabilities
with priority (see below)
Net free assets
Estimated deficiency
(squeeze)
Totals
600,000
LIABILITIES
Unsecured liabilities with
priority:
Net defined benefit liability
Legal and other fees
700,000
Fully secured creditors:
Notes payable
200,000
800,000
(700,000)
100,000
400,000
500,000
Realizabl
e values
Unsecured
non-priority
liabilities
600,000
100,000
-
700,000
-
12
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500,000
Partially secured
creditors:
Short-term bank loan
Inventories
300,000
Unsecured creditors:
Accounts payable
(550,000)
1,550,000
Shareholders' equity
Totals
PROBLEM 5-5: THEORY
1. B
6.
2. C
7.
3. A
8.
4. D
9.
5. C
10.
D
B
D
A
D
PROBLEM 5-6: THEORY
1. A
6.
2. C
7.
3. A
8.
4. C
9.
5. B
10.
C
B
C
D
C
500,000
(300,000)
200,000
300,000
300,000
-
500,000
PROBLEM 5-7: MULTIPLE CHOICE: COMPUTATIONAL
1. B
Solution:
Assets pledged to fully
secured creditors:
Accounts receivable
Notes payable
Realizable
value
320,000
(280,000)
Available for
unsecured creditors
40,000
13
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Land and building
Bank loan
450,000
(250,000)
Estimated amount out of assets pledged
with fully secured creditors
2. C
Solution:
Assets pledged to fully
secured creditors:
Accounts receivable
Notes payable
Realizable
value
320,000
(280,000)
Land and building
Bank loan
450,000
(250,000)
Inventories
Inventories pledged to partially
secured creditors
200,000
240,000
Available for
unsecured creditors
40,000
200,000
70,000
(40,000)
Net free assets
30,000
270,000
3. B
Solution:
Realizable value
Assets pledged with fully
secured creditors
Fully secured creditors
190,000
(130,000)
Free assets
Total free assets
Liabilities with priority
Net free assets
Partially secured creditors
Assets pledged with
partially secured creditors
Available for
unsecured creditors
60,000
140,000
200,000
(20,000)
180,000
Secured and
Priority claims
100,000
(60,000)
Unsecured creditors
Total unsecured liabilities
without priority
Unsecured liabilities
without priority
40,000
260,000
300,000
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Net free assets
Divide by: Total unsecured liabilities without
priority
Recovery percentage
180,000
300,000
60.00%
Assets pledged with partially secured creditors
Partially secured creditors
Assets pledged with partially secured creditors
Excess to be paid from net free assets
Multiply by: Recovery percentage
Total amount paid to partially secured
creditors
60,000
100,000
(60,000)
40,000
60.00%
24,000
84,000
4. D
Solution:
Unsecured creditors
Multiply by: Recovery percentage
Amount paid to unsecured creditors
260,000
60.00%
156,000
5. C
Solution:
Available for unsecured
creditors
160,000
(16,000)
144,000
Free assets
Liabilities with priority
Net free assets
6. D
Solution:
Unsecured portion of partially secured
creditors
Unsecured creditors
Total unsecured liabilities without priority
Net free assets
Divide by: Total unsecured liabilities without
priority
Recovery per peso
25,000
155,000
180,000
144,000
180,000
0.80
7. A
Solution:
Assets pledged with partially secured creditors
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50,000
Free assets
160,000
Liabilities with priority
(16,000)
Partially secured creditors
(75,000)
Unsecured creditors
(155,000)
Deficiency
(36,000)
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