Corporate Liquidation
1. It refers to process of winding up the affairs of the corporation by settling its corporate debts and
distributing the remainder to the stockholders.
a. Corporate liquidation
b. Corporate dissolution
c. Corporate rehabilitation
d. Corporate termination
2. These are the assets pledged to a specific liability which the estimated realizable value of the assets
exceeds the amount of liability.
a. Assets pledged to partial secured creditors
b. Assets pledged to fully secured creditors
c. Assets pledged to unsecured creditors
d. Free assets
3. These are liabilities that, although not secured by any asset, are mandated by law to be paid first
before any other unsecured liabilities:
a. Unsecured liabilities without priority
b. Fully secured creditors
c. Partially secured creditors
d. Unsecured liabilities with priority
4. Which of the following unsecured debts with priority shall be paid first during corporate liquidation?
a. Corporate liabilities to employees
b. Obligations arising from corporate crime
c. Corporate liabilities arising from taxes to government
d. Obligations arising from corporate tort or quasi-delict
5. The following are considered unsecured creditors with priority except
a. Wages
b. Taxes
c. Administrative / Liquidation expenses
d. Loans
6. Which of the following creditors can always fully recover its claim from a dissolved corporation
during corporate liquidation?
a. Fully secured creditors
b. Partially secured creditors
c. Unsecured creditors with priority
d. Unsecured creditors without priority
7. Which of the following items is not being considered in the computation of recovery percentage of
unsecured creditors without priority?
a. Assets reserved for fully secured credits
b. Assets reserved for partially secured credits
c. Unsecured portion of partially secured liabilities
d. Assets not used as collateral for any liability
8. The total free assets in the statement of affairs will be available to the following, except:
a. Fully secured creditors
b. Partially secured creditors
c. Unsecured creditors with priority
d. Unsecured creditors without priority
9. The net free assets in the statement of affairs represents an amount that is expected to be available to:
a.
b.
c.
d.
Total Unsecured liabilities
Unsecured creditors without priority only
Unsecured creditors with priority only
The secured portion of partially secured liabilities
Problem 1
Goodbye Co’s financial position before the start of its liquidation is as follows:
ASSETS
Cash
600,000 Accounts receivable
Prepaid expenses
Inventory
Land
Building
Equipment, net
Goodwill
TOTAL
138,400
1,200,000
50,000
3,120,000
1,600,000
2,400,000
800,000
100,000
9,408,400
LIABILITIES AND EQUITY
Accounts payable
3,200,000
Income tax payable
1,800,000
Note payable (secured by equipment)
2,000,000
Loan payable (secured by land and bldg.)
2,400,000
Share capital
4,000,000
Retained earnings (deficit)
(3,991,600)
TOTAL
9,408,400
Additional information:
•
•
•
•
•
•
•
•
•
•
Only 50% of the accounts receivable is collectible. 600,000 ERV
The entire inventory is expected to be sold half the cost. 1,560,000 ERV
The land and building are expected to be sold at a lump sum price of P 4,600,000.
The equipment is expected to be sold at carrying amount but after refurbishment costs of P
800-140 = 660
140,000.
Certain accounts payable are measured gross of P 46,000 cash discount which Goodbye intends to
take. A supplier waived repayment of a P 840,000 account.
The prepayments are fully refundable.
The taxing authority gave Goodbye a six-month tax amnesty to settle the tax liability for P
1,560,000.
Interests of P 160,000 and P 140,000 are expected to be paid on the note and loan, respectively.
Liquidation costs of P 240,000 are expected to be incurred.
Accrued wages payable not yet recorded amounted to P 320,000.
1. How much of the assets will be available to unsecured liabilities?
a.
b.
c.
d.
2,288,400
4,408,400
4,548,400
2,528,400
2. How much is the estimated deficiency to unsecured creditors without priority?
a. 1,285,600
b. 1,386,600
c. 1,525,600
d.
0
3. Which of the following statements is true?
a.
b.
c.
d.
Shareholders of Goodbye can expect to receive 60% of their claims.
The lender of the loan payable will receive 60% of its claim.
Employees of Goodbye can expect to receive only 60% of their claims.
The issuer of the note payable will receive 1,560,000.
Problem 2
Because of inability to pay its debts, the KDC Manufacturing Company has been forced into bankruptcy
as of June 30, 2021. The Statement of Financial Position on that date shows:
Assets
Cash
Accounts Receivable
Notes Receivable
Inventories
Prepaid Expenses
Land and Buildings
Equipment
5,665
39,350
18,500
87,850
950
61,250
48,800
Liabilities and Equity
Accounts Payable
Notes Payable – BPI
Notes Payable - Suppliers
Accrued Wages
Accrued Taxes
Mortgage Bond Payable
Common Stock – P100 par
Retained Earnings
P262,365
52,500
15,000
51,250
1,850
4,650
90,000
75,000
(27,885)
P262,365
Additional Information:
a. Only P16,110 of Accounts Receivable and P12,500 of Notes Receivable are expected to be
collectible. The good notes are pledged to Bank of the Philippine Islands.
b. Inventories are expected to realize P45,100 when sold under insolvency.
c. Land and Buildings have an appraised value of P95,000. They serve as security on the bonds.
d. The current value of the equipment, net of disposal cost is P9,000.
1. The estimated loss on asset disposition is
a. 29,240
b. 112,740
c. 111,790
d. 82,550
2. What is the estimated gain on asset disposition?
a. 33,750
b. 41,000
c. 34,700
d.
0
3. The expected recovery percentage is:
a.
b.
c.
d.
67%
70%
48%
50%
4. Assuming the correct expected recovery percentage as computed above, how much is the
amount expected to be paid for the accrued wages and accrued taxes?
a.
b.
c.
d.
4,355
4,550
3,120
6,500
Problem 3
A company is to be liquidated and has the following liabilities:
Income taxes
Notes payable (secured by land)
Accounts payable
Salary payable
Bonds payable (secured by building)
Administrative expenses for liquidation
8,000
120,000
83,000
6,000
70,000
20,000
The company has the following assets:
Current assets
Land
Building
Book Value
Fair Value
80,000
100,000
100,000
33,550
90,000
110,000
How much will the holders of notes payable collect following the liquidation?
a.
b.
c.
d.
120,000
90,000
100,500
108,000
Problem 4
The following data were taken from the statement of realization and liquidation of DLR Corporation for
the quarter beginning September 30, 2022:
Assets to be realized
Assets acquired
Assets realized
Assets not realized
Liabilities to be liquidated
Liabilities assumed
Liabilities liquidated
Liabilities not liquidated
Supplementary credits
Supplementary charges
495,000
540,000
630,000
225,000
( 810,000
270,000
305,000
675,000
765,000
937,000
As of September 30, 2022, DLR’s capital stock is P450,000 and retained earnings is P432,000. No
additional shares were issued after that date.
1. What is the net income (loss) for the period?
a. 252,000
b. (252,000)
c. (315,000)
d. 315,000
2. What is the ending cash balance?
a. 1,305,000
b.
840,000
c. 1,050,000
d. 1,080,000