MODULE 2_CA51027
CORPORATE LIQUIDATION
Part I: Theory of Accounts
1.
Which of the following statements is CORRECT?
a.
The current and noncurrent classification of assets and liabilities are considered
relevant to companies undergoing liquidation.
b.
In the Statement of Affairs, the expected recovery percentage may be relevant in
some circumstances to creditors who are fully secured.
c.
In the periodic report of the trustee, supplementary credits and
supplementary charges are items that affect the computation of the income or loss
of the receiver during the period.
d.
The expected recovery percentage for unsecured liabilities with priority is always
100 percent.
2.
Which of the following statements is CORRECT?
a.
The special reports prepared by the trustee both present the book values of the
debtor company’s statement of financial position accounts, the estimated realizable values
of the assets, the order of the claims, and the estimated deficiency to the general unsecured
creditors/liabilities.
b.
The trustee appointed by the Securities and Exchange Commission receives title to
all assets as a receivership, becomes responsible for the debtor’s actual management and
must adhere with the board of directors’ plan of liquidation.
c.
Interest payable on bonds may be categorized as unsecured liabilities with priority
claims as long as the related principal is fully secured.
d.
The Statement of Financial Affairs and the Statement of Realization and
Liquidation prepared by the trustee uses the Statement of Financial Position of the
Corporation under liquidation as the basis in the preparation of the reports
mentioned.
3.
Which of the following statements is CORRECT?
a.
The Statement of Realization and Liquidation represents the change in the
estate equity/estate deficit during the period.
b.
In the Statement of Realization and Liquidation, an increase in the supplementary
charges has a corresponding increase in the liabilities to be liquidated during the period.
c.
In the periodic report of the receiver, assets not realized at the end of the period
must equal the total liabilities and estate deficit at the end in the Statement of Financial
Position of the corporation undergoing liquidation.
d.
In the Statement of Financial Affairs, total free assets are all assets having an
estimated realizable value available for payment.
Part II: Problem Solving
Problem 1. The GCI Corporation is undergoing liquidation and has the
following condensed Statement of Financial Position as of January 1, 2021:
Assets
Cash
Receivables
Inventory
Prepaid Expenses
Building (net)
Goodwill
Total Assets
Liabilities & Shareholders’ Equity
P 913,600
2,726,400
640,000
20,000
2,760,000
440,000
_________
P7,500,000
Salaries Payable
Accounts Payable
Mortgage Payable
Loan Payable
Note Payable
Ordinary shares
Deficit
P 400,000
868,000
3,200,000
1,760,000
640,000
960,000
(328,000)
_________
P7,500,000
The mortgage payable is secured by the building having an estimated realizable value of
P2,880,000. Accounts payable amounting to P480,000 is secured by the receivables
amounting to P681,600 which is estimated to be collectible in the amount of P545,280.
The balance in the recorded amount of the receivables which has an estimated realizable
value of P1,880,000 is used to secure the loan payable. The inventory is estimated to be
sold in the amount of P424,000. In addition to the recorded liabilities are accrued interest
on mortgage payable amounting to P32,000, liquidation expenses amounting to P76,000
and taxes amounting to 32,000. (use two decimal places for the recovery percentage Ex:
71.25%)
AP 868,000:
-----480,000 ---secured by AR 545,280
-----388,000-----unsec w/o
Assuming: NP 100,000 Int Pay on NP 20,000
---40% of NP with related interest of 10,000 is secured by land
---20% of NP with related interest of 2,000 is secured by mdse
---15% of NP with related interest of P3,000 is secured F&F
Which of the following statements is WRONG?
a. The estimated deficiency to unsecured creditors is P365,120.
b.
Estimated payment to partially secured creditors is P3,138,861.
c.
Estimated payment to unsecured creditors without priority is P755,991.
d.
Estimated loss on asset realization is P857,120.
Solution: SOFA
Free Assets
Not Pledged:
Cash
Inventory
Free Portion:
Unsecured Liabilities(w/o)
P913,600
424,000
Acc Rec (Acc Pay)
Acc Rec (Loans Pay)
65,280
120,000
Total Free Asset
P1,522,880
Less: With Priority
1.Liquidation Expenses
2.Salary Payable
3.Taxes Payable
Net Free Assets
Without Priority:(no collateral)
Accounts Payable
Notes Payable
P388,000
640,000
Unsecured Portion:
Mortgage Payable &
Related Interest
352,000
( 76,000)
( 400,000)
( 32,000)
P1,014,880 Total Unsecured (w/0)
Estimated Deficiency to Unsecured creditors
Expected Recovery %
73.54% P1: .74
P1,380,000
P365,120
----------------------------------------------------------------------------------------------------------------------------
Estimated Payment to:
Fully Secured Liabilities
Accounts Payable
Loans Payable
P 480,000
1,760,000
P2,240,000
100%
Partially Secured Liabilities
P 3,232,000
(2,880,000) 1:1
352,000
x 73.54%
258,861
+ 2,880,000
P3,138,861 3,232,000=
Mortgage Payable & Related Interest
Less:
Building
Unsecured Portion
97.12%
Unsecured Liabilities with Priority
Liquidation Expenses
Salary Payable
Taxes Payable
P
76,000
400,000
32,000
P 508,000
100%
Unsecured Liabilities without Priority
Accounts Payable
Notes Payable
P1,028,000
x 73.54%
P 755,991
P 388,000
640,000
73.54%
Estimated Gain/ (Loss) on Asset Realization
Recorded Amount Estimated Realizable Amount
Receivables
Inventory
Prepaid Expenses
Building (net)
Goodwill
Delivery Truck
P 2,726,400
640,000
20,000
2,760,000
440,000
-
Estimated Loss on Asset Realization
Estimated Gain on Asset Realization
P2,425,280
424,000
0
2,880,000
0
70,000
Est Gain/(Loss)
P(301,120)
(216,000)
( 20,000)
120,000
(440,000)
P(977,120)
120,000
estimated net loss/gain (857,120)
Problem 2. The following information are related to VMR Corporation which
is undergoing liquidation:
a.
Cash available prior to liquidation amounts to P95,200.
b.
Building with a carrying amount of P1,032,000 is expected to be sold at P792,000.
c.
Bonds payable amounting to P588,800 is secured by Merchandise Inventory with
book value of P984,000 and estimated realizable value of 2/3 of the recorded amount.
656,000
d.
Of the P1,564,800 accounts payable, P440,000 is secured by an equipment with a
carrying amount of P614,400 which is estimated to be 70% realizable. 430,080
e.
Other unrecorded liabilities are accrued interest payable on bonds, P24,800;
salaries payable, P139,200; taxes payable, P92,800; and trustee’s fee, P68,000.
f.
Total assets of VMR Corp. presented in the Statement of Financial Position prior
to liquidation amounts to P3,840,000, including prepaid expenses and goodwill with
recorded amounts of P60,800 and P176,000, respectively which are not expected to be
realized. Remaining non-cash assets other than those whose realizable values were
mentioned above have an estimated realizable value of 60% of the recorded amount.
g.
Total liabilities of VMR Corp. presented in the Statement of Financial Position
prior to liquidation amounts to P3,040,000.
Compute the estimated deficiency to unsecured liabilities.
a.
b.
c.
d.
413,568
864,960
960,160
540,160
Solution:
Free Assets
Not Pledged:
Cash
Building
Others
Free Portion:
Unsecured Liabilities
P
95,200 (a)
792,000 (b)
526,560 (f)
Inventory
P
42,400 (c)
Total Free
P1,456,160
Less: With Priority
Liquidation Expenses ( 68,000)
Salary Payable
( 139,200)
Taxes Payable
( 92,800)
P1,156,160
Net Free
P2,021,120
Estimated Deficiency
Expected Recovery %
Without Priority: (Nothing was pledged)
Accounts Payable
Others
P1,124,800 (d)
886,400 (g)
Unsecured Portion:
Accounts Payable
Total Unsecured
P864,960
57.20%
9,920 (d)
Problem 3. MGL Company is in bankruptcy and is being liquidated. The
trustee is estimating to convert all assets into P18,000,000 cash and has
prepared the following list of approved claims in the Statement of Financial
Affairs:
Income tax payable
▪
Accounts payable
▪
Administrative fees and other costs of liquidation
▪
2,400,000
Mortgage payable (secured by fixed asset
▪
estimated to be sold for P12,000,000)
Note payable (secured by all accounts receivable
▪
amounting to P6,000,000 of which P1,500,000
is estimated to be uncollectible)
P 900,000
4,500,000
9,000,000
6,000,000
Compute the estimated payment on the note payable
a.
b.
c.
d.
4,500,000
4,800,000
4,875,000
6,000,000
Solution:
Total Assets /Cash
P18,000,000
Less: Estimated Payment to Fully
(9,000,000) Mortgage Payable
Less: Estimated Payment to Partially (4,500,000) Notes Payable
Total Free Assets
P 4,500,000
Less: With Priority
(3,300,000)
Net Free Assets
P 1,200,000
Unsecured Liabilities
(4,500,000 + 1,500,000)
Estimated Deficiency
Expected Recovery %
P 6,000,000 (AP + Unsec Por of NP)
P 4,800,000
20% (1.2M/6M)
Partially Secured Liabilities
Notes Payable
Less: Acc Rec
Unsecured Portion
Add:
P6,000,000
(4,500,000)
P1,500,000
x 20%
300,000
4,500,000
4,800,000/6M = 80%
Problem 4. KDC Corporation is undergoing liquidation. The trustee of KDC
Corp. presented the following information:
Assets amounting to P1,000,000 are available to unsecured liabilities without priority.
Assets amounting to P880,000 represents assets originally not pledged to any liabilities.
Unpaid liabilities are as follows: administrative expenses: P168,000; taxes: P144,000 and
wages: P256,000. Accounts payable and notes payable totaled P1,440,000. No assets
were pledged on the said liabilities. Estimated payment to fully secured creditors and
partially secured creditors amounts to P1,112,000 and P1,152,000 respectively. The
expected recovery percentage is 40%.
1.
Compute the estimated amount of assets pledged to fully secured creditors
a.
b.
c.
d.
1,112,000
1,800,000
1,880,000
1,992,000
2.
Compute the estimated amount to be paid to all creditors
a.
b.
c.
d.
3,408,000
1,500,000
3,832,000
1,680,000
Solution:
Net Free Assets
P 1,000,000
Add: With Priority
Total Free Assets
Less: Assets Not Pledged
Free Portion
Add: Payment to Fully Secured
Assets Pledged to Fully
568,000
P 1,568,000
(880,000)
P 688,000 + 1,112,000
1,112,000
P 1,800,000
Estimated Payment to All Creditors
Fully Secured Creditors
Partially Secured Creditors
Unsecured with Priority
Unsecured without Priority
P1,112,000 GIVEN
1,152,000 GIVEN
568,000 GIVEN
P 576,000 DERIVED(1,440,000 x 40%)
P3,408,000
Alternative Computation:
Assets Pledged to Fully
*Assets Pledged to Partially
Free Assets (not pledged)
Net Free Assets
Divided by Recovery %
TOTAL Unsecured Liabilities
Less: Without Priority
Unsecured Portion
P1,800,000
728,000
880,000
P3,408,000
P1,000,000 GIVEN
40% GIVEN
P2,500,000
(1,440,000) GIVEN
P1,060,000 DERIVED
Estimated Payment to Partially Secured
Less: (1,060,000 x 40%)
*Assets Pledged to Partially
P1,152,000 GIVEN
( 424,000)
728,000
SORAL --- PERIODIC REPORT---ESTATE DEFICIT
DEBIT
1.
ASSETS TO BE REALIZED
2.
INCREASE IN ASSETS
REALIZED
CREDIT
1. ASSETS REALIZED
2. ASSETS NOT
3. LIAB LIQUIDATED
4. LIAB NOT LIQUIDATED
3. LIAB to BE LIQUIDATED
4. INCREASE IN LIAB
5. SUPPLEMENTARY CHARGES
5. SUPPLEMENTARY CREDIT
TOTAL DEBITS> TOTAL CREDITS = net loss
TOTAL DEBITS<TOTAL CREDITS= net income
Problem 5. CIG Corporation provided the following balances in October 1,
2020: STATEMENT OF FINANCIAL POSITION
Cash
Accounts receivable
Inventories
Notes receivable
Equipment
Furnitures
Machinery
807,500
150,000
425,000
300,000
210,000
130,000
200,000
Accounts payable
Wages payable
Tax payable
Note payable
Mortgage payable
Total
2,222,500
Total
Share capital
Deficit/(RE)
400,000
125,000
75,000
400,000
750,000
750,000
(277,500)
2,222,50
0
In the Statement of Realization and Liquidation the following data were ascertained for
the month of October:
▪
Interests not accrued for the month were for the notes payable P35,000, for the
mortgage payable P75,000 and for the notes receivable P12,000.
▪
The mortgage payable together with its respective interests were paid.
1/3 of the existing accounts receivable at the beginning of the month was collected
▪
for only P42,000.
P180,000 of the total inventories were sold for P225,000 cash. (Perpetual Inventory
▪
System)
Only P138,000 was collected out of half of the total amount of the notes receivable
▪
recorded as of October 1, included in the amount collected was the related interest on the
notes in the amount of P6,000.
▪
Furniture was sold for P85,000.
▪
Administrative expenses of P60,000 were paid.
▪
Wages Payable was paid.
Additional sales amounting to P170,000 were made for the remaining inventories.
▪
(Perpetual Inventory System)
Remaining non-cash assets are to be realized and remaining liabilities are to be paid
▪
in the next period(s) of liquidating CIG Corporation.
Compute the profit or loss of the trustee for the month of October (accountability
technique)
a.
b.
c.
d.
(259,000)
(536,500)
213,500
18,500
Technique in the computation of the net income or loss of the trustee:
Revenue and Gains
vs.
12,000
110,000
8,000
18,000
45,000
60,000
75,000
45,000
57,000
Cost and Expenses
vs.
316,000 = (259,000)
Solution: (SORAL) Alternative 1
Asset to be Realized10/1
Accounts Receivable
Inventories
Notes Receivable
Equipment
Furnitures
Machinery
150,000
425,000
300,000
210,000
130,000
200,000 P1,415,000
Increase in Asset ( Inc. during)
Interest Receivable
Accounts Receivable
Machinery
Asset Realized(dec. during)
Accounts Receivable
Inventories
Notes & Interest
Furnitures
42,000
180,000
245,000
138,000
85,000
P690,000
Asset not Realized 10/31
12,000
Accounts Receivable
270,000
170,000 P182,000
Notes & Interest
156,000
Equipment
210,000
200,000 P836,000
Liabilities Liquidated (paid)
Liabilities to be Liquidated 10/1
Liabilities not Liquidated 10/31
Increase in Liabilities (inc during)
Supplementary Charges
Supplementary Credits
Interest Expense
Cost of Goods Sold
Interest Income
Sales
Mortgage Payable
Interest Payable
Wages Payable
Accounts Payable
Taxes Payable
Interest Payable
Notes Payable
750,000
Accounts Payable
400,000
75,000
Wages Payable
125,000
125,000 P950,000
Taxes Payable
75,000
Notes Payable
400,000
Mortgage Payable
750,000 P1,750,000
400,000
Interest Payable
75,000
35,000
400,000 P910,000
110,000
180,000
245,000
Administrative Exp
60,000 P595,000
Total Debit
Total Credit
Loss
P4,052,000
P3,793,000
P( 259,000)
110,000
12,000
225,000
170,000
P407,000
Solution: (SORAL) Alternative 2
Asset to be Realized10/1
Accounts Receivable
Inventories
Notes Receivable
Equipment
Furnitures
Machinery
150,000
425,000
300,000
210,000
130,000
200,000 P1,415,000
Increase in Asset ( Inc. during)
Interest Receivable
Accounts Receivable
Machinery
Asset Realized(dec. during)
Accounts Receivable
Inventories
Notes & Interest
Furnitures
42,000
225,000
170,000
138,000
85,000
P660,000
Asset not Realized 10/31
12,000
Accounts Receivable
270,000
170,000 P182,000
Notes & Interest
156,000
Equipment
210,000
200,000 P836,000
Liabilities Liquidated (paid)
Liabilities to be Liquidated 10/1
Liabilities not Liquidated 10/31
Increase in Liabilities (inc during)
Supplementary Charges
Supplementary Credits
Interest Expense
110,000
Interest Income
Administrative Exp
60,000 P170,000
Mortgage Payable
Interest Payable
Wages Payable
Accounts Payable
Taxes Payable
Interest Payable
Notes Payable
Total Debit
Total Credit
Loss
750,000
Accounts Payable
400,000
75,000
Wages Payable
125,000
125,000 P950,000
Taxes Payable
75,000
Notes Payable
400,000
Mortgage Payable
750,000 P1,750,000
400,000
Interest Payable
75,000
35,000
400,000 P910,000
P3,627,000
P3,368,000
P( 259,000)
110,000
12,000
Solution: (SORAL) Alternative 3
Asset to be Realized10/1
Accounts Receivable
Inventories
Notes Receivable
Equipment
Furnitures
Machinery
150,000
425,000
300,000
210,000
130,000
200,000 P1,415,000
Increase in Asset ( Inc. during)
Interest Receivable
Accounts Receivable
Machinery
Asset Realized(dec. during)
Accounts Receivable
Inventories
Notes & Interest
Furnitures
42,000
225,000
170,000
138,000
85,000
Asset not Realized 10/31
12,000
Accounts Receivable
270,000
170,000 P182,000
Notes & Interest
156,000
Equipment
210,000
200,000 P836,000
Supplementary Charges
Supplementary Credits
Interest Expense
110,000
Interest Income
Administrative Exp
60,000 P170,000
Total Debit
Total Credit
Loss
P660,000
P1,767,000
P1,508,000
P( 259,000)
12,000
Alternative Computation:
Sales (225,000 + 170,000)
Cost of Goods Sold
Loss
Administrative Expenses
Interest Expense
Interest Income
Loss on Realization (Note A)
Net Loss
Note A
Carrying Value
Accounts Receivable
P50,000
Notes Receivable & Interest
P156,000
Furnitures
P130,000
P 395,000
(425,000)
P (30,000)
(60,000)
(110,000)
12,000
( 71,000)
P(259,000)
Proceeds
Gain/(Loss)
P42,000
P8,000
P138,000
P18,000
P85,000
P45,000
P(71,000)
CIG CORPORATION
Statement of Financial Position
As of October 31, 2020
Assets
Cash (Note B)
Accounts Receivable
Notes Receivable
Interest Receivable
Equipment
Machinery
287,500
270,000
150,000
6,000
210,000
200,000
P1,123,500
Liabilities
Accounts Payable 400,000
Tax Payable
75,000
Notes Payable
400,000
Interest Payable 35,000
910,000
Share Capital
750,000
Deficit
(536,500)(C)
Estate Equity
(D)
213,500
P1,123,500
******* What if?
Accounts Payable xxx
Notes Pay
xxx
Int Pay
xxx
C/S
xxx
Deficit
xxx
Note B
Cash, Oct 1
P807,500
Add: Collections from AR
42,000
Collections from NR & Interest
138,000
Proceeds from the sale of Furniture
85,000
Cash Sales
225,000
Deduct: Payment for Mortgage & Interest
(825,000)
Wages Payable
(125,000)
Administrative Expenses
( 60,000) P287,500
Note C
Deficit, Oct 1
Net Loss during the month
Deficit, Oct 31
P(277,500)
(259,000)
P(536,500)
Note D
Estate Equity, Oct 1
Net Loss during the month
Estate Equity, Oct 31
P472,500
(259,000)
P213,500
Problem 6. RMV Corporation has been undergoing liquidation since January
1. As of June 30, its condensed Statement of Realization and Liquidation is
presented below:
Assets realized
Interest on Investment
Purchases (Periodic)
Increase in Assets
Liabilities assumed
Payment of expenses of trustee
Liabilities to be liquidated
Sales on Account
Assets not realized
Liabilities not liquidated
Sales for cash
Assets to be realized
Compute the net gain (loss) on realization and liquidation
a.
b.
c.
d.
(1,169,000)
(959,000)
1,169,000
959,000
Solution:
P 4,200,000
21,000
210,000
700,000
210,000
1,050,000
9,100,000
700,000
5,880,000
4, 459,000
3,500,000
13,300,000
Asset to be Realized
13,300,000
Increase in Asset
700,000
Asset Realized
4,200,000
Asset not Realized
5,880,000
9,100,000
Liabilities Liquidated
4,851,000
Liabilities to be Liquidated
Liabilities not Liquidated
4,459,000
Increase in Liabilities
210,000
Supplementary Charges
1,050,000
Supplementary Credits
24,570,000
210,000
21,000
700,000
3,500,000
23,611,000
Net Loss P(959,000)
Problem 7. The following data were taken from the Statement of Realization
and Liquidation of LGM Corp. for the quarter ended June 30, 2020
Assets to be realized
Supplementary credits
Liabilities to be liquidated
Supplementary charges
Liabilities liquidated
Assets acquired
Assets realized
Liabilities assumed
4,400,000
6,300,000
6,700,000
5,800,000
4,800,000
4,200,000
5,500,000
5,900,000
The ending balances of capital stock and retained earnings were P4,500,000 and
P2,000,000, respectively. A net loss of P1,800,000 resulted for the period. Compute the
ending balance of cash
a.
b.
c.
d.
12,500,000
13,500,000
11,700,000
14,300,000
Solution:
Asset to be Realized
4,400,000
Asset Realized
5,500,000
Increase in Asset
4,200,000
Asset not Realized
800,000
Liabilities Liquidated
4,800,000
Liabilities to be Liquidated
6,700,000
Liabilities not Liquidated
7,800,000
Increase in Liabilities
5,900,000
Supplementary Charges
5,800,000
Supplementary Credits
6,300,000
27,000,000
25,200,000
Net Loss
P(1,800,000)
Asset
=
Liabilities
14,300,000
=
7,800,000
( 800,000) Non-cash Assets
13,500,000 Cash
-E N D-
+
+
SHE
6,500,000