2.1 Examples

CORPORATE LIQUIDATION
I
The D Corporation, which is undergoing liquidation, has the following condensed balance sheet as
of July 1, 2008:
Assets Liabilities and Shareholders’ Equity

Cash P 396,000 Salaries Payable P120,000
Receivables(net) 924,000 Accounts Payable 300,000
Inventory 231,000 Bonds Payable 270,000
Prepaid Expenses 3,000 Bank Loan Payable 1,200,000
Equipment (net) 900,000 Note Payable 594,000
Goodwill 120,000 Ordinary shares 240,000
Deficit (150,000)
Total P2,574,000 Total P2,574,000

The bank loan payable is secured by the equipment having a book value of P900,000 and a
realizable value of P1,050,000. Of the accounts payable, P140,000 is secured by inventory
which has a cost of P120,000 and a liquidation value of P132,000. The balance of the inventory
has a realizable value of P70,000. Receivables with a book value and realizable value of
P624,000 and P600,000 respectively have been pledged as collateral on the note payable. The
balance of the receivable is estimated to be 60% collectible. In addition to the recorded liabilities
are accrued interest on bank loan payable amounting to P30,000, accrued interest on the bonds
payable amounting to P18,000, trustee’s fee amounting P25,000 and taxes payable amounting
to P21,000.
Prepare a Statement of Affairs in July
Solution:
BV NRV Classification
Cash 396,000 396,000 Unpledged assets
Receivables (net) 924,000 600,000 Assets pledge to Fully Secured Creditors
Receivables (net) 180,000 Unpledged assets
Inventory 231,000 132,000 Assets pledge to Partially Secured Creditors
Inventory 70,000 Unpledged assets
Prepaid Expenses 3,000 - Unpledged assets
Property and Equipme 900,000 1,050,000 Assets pledge to Partially Secured Creditors
Goodwill 120,000 - Unpledged assets
Salaries Payable 120,000 120,000 Priority Creditors
Accounts Payable 300,000 140,000 Partially Secured Creditors
Accounts Payable 160,000 Unsecured Creditors
Bonds Payable 270,000 270,000 Unsecured Creditors
Interest Payable 18,000 Unsecured Creditors
Bank Loan Payable 1,200,000 1,200,000 Partially Secured Creditors
Interest Payable 30,000 Partially Secured Creditors
Note Payable 594,000 594,000 Fully Secured Creditors
Ordinary shares 240,000
Deficit (150,000) (150,000) Squeeze
Taxes Payable 21,000 Priority Creditors
Trustees Expenses 25,000 Priority Creditors
Total - -
Assets Free Portion < Liabilities Unsecured Priority Deficiency

APFSC-FSC 6,000 < PSC-APPSC 188,000
Unpledged Assets 646,000 < Unsecured Creditors 448,000
< Priority Creditors 166,000
Total Free Assets 652,000 < 636,000 166,000 (150,000)
Squeeze
Recovery Rate = Available Assets / Unsecured Creditors
Recovery Rate = (652-166) / 636
Recovery Rate = 0.76
Fully Secured Creditors = 100% of amount owed FSC 594,000

Priority Creditors = 100% of amount owed to Priority Creditors 166,000
Partially Secured Creditors = 100% of APPSC + ((PSC-APPSC) x Rec. Rate) 1,325,660
Unsecured Creditors = 100% of amount owed to Unsecured Creditors x Rec. Rate 342,340
II
On July 1, 2008, the records of Mr. X, trustee in bankruptcy for B Corporation, showed the
following:
Cash P 57,400
Assets to be realized:
Furnitures 70,000
Buildings 301,000
Machinery 196,000
Copyright 30,800
Liabilities to be liquidated:
Accounts payable 560,000
Notes payable 280,000
Estate Deficit 184,400
During July, Mr. X sold machinery having a book value of P105,000 for P61,600 and sold the
copyright for P84,000. Mr. X was paid P9,100 as trustee fee and P147,000 was distributed
proportionately to the creditors.
Prepare a statement of realization and liquidation for July.
Solution:
Assets to be realized 597,800.00 Assets Realized 145,600.00

Assets Assumed - Assets not realized 462,000.00
Liabilities Liquidated 147,000.00 Liabilities to be Liquidated 840,000.00
Liabilities not Liquidated 693,000.00 Liabilities Assumed -
Supplementary Debits 9,100.00 Supplementary Credits -
1,446,900 1,447,600
Net Income 700
Estate Deficit (184,800)
Estimated Deficiency (184,100)
Alternative Solution
Book Value of Capital Account (change 184,400 to 184,800, error) (184,800)
Increases in Assets Copyright 53,200
Decreases in Assets Machinery (43,400)
Cash (156,100)
Decreases in Liabilities 147,000
Net Income 700
Estimated Deficiency (184,100)
III
The following data were taken from the statement of realization and liquidation of XYZ
Corporation for the quarter ended September 30, 2008:
Assets to be realized P 330,000
Assets acquired 360,000
Assets realized 420,000
Assets not realized 150,000
Liabilities to be liquidated 540,000
Liabilities assumed 180,000
Liabilities liquidated 360,000
Liabilities not liquidated 450,000
Supplementary credits 510,000
Supplementary charges 468,000
The ending balances of capital stock and retained earnings are P300,000 and P120,000,
respectively.
What is the net income (loss) for the period? How much is the ending balance of cash?
A. P168,000; P720,000 C. P(210,000); P560,000
B. P(168,000); P720,000 D. P42,000; P560,000
Solution:
Assets to be realized 330,000.00 Assets Realized 420,000.00

Assets Acquired 360,000.00 Assets not realized 150,000.00
Liabilities Liquidated 360,000.00 Liabilities to be Liquidated 540,000.00
Liabilities not Liquidated 450,000.00 Liabilities Assumed 180,000.00
Supplementary Debits 468,000.00 Supplementary Credits 510,000.00
1,968,000 1,800,000
Net Loss 168,000
When a corporation is liquidating, another way of computing for Net Income/Net Loss is the above template
This template is derived from the basic concept of Taccount.
Learn first the meaning of the accounts
Assets to be realized Beginning Balance of Non-Cash Assets Beg
Assets Acquired Self Explanatory Inc
Assets Realized Selling Price of Sold Assets Selling Price
Assets not realized Ending Balance of Non-Cash Assets End
Liabilities to be Liquidated Beginning Balance of Liabilities Beg
Liabilities Assumed Self Explanatory Inc
Liabilities Liquidated Settlement Price of Liabilities Settlement Price
Liabilities not Liquidated Ending Balance of Non-Cash Assets End
Supplementary Credits Self Explanatory
Supplementary Debits Self Explanatory
Assets
330,000 Beg
360,000 Inc 540,000 Dec (Squeeze)
150,000 End
Selling Price 420,000

BV of Asset Sold (540,000)
G/(L) (120,000)
Liabilities
540,000 Beg
270,000 Dec (Squeeze) 180,000 Inc
450,000 End
Setllement Price (360,000) Supplementary Credits 510,000

BV of Asset Sold 270,000 Supplementary Charges (468,000)
G/(L) (90,000) G/L Assets (120,000)
G/L Liabilities (90,000)
Net Gain or Loss (168,000)
IV
A review of the assets and liabilities of G Company in bankruptcy on June 30, 2008, discloses
the ff:
a. A mortgage payable of P118,000, is secured by building valued at P39,000 less than its
book value of P172,000.
b. Notes payable of P57,000 is secured by furniture and equipment with a book value of
P76,000 that is 3/5 realizable.
c. Assets other than those referred to have an estimated value of P44,000, an amount that
is 75% of its book value
d. Liabilities other than those referred to total P91,000, which included claims with priority
of P23,000.
How much was paid to the partially secured creditors?

A. P52,340 B. P48,260 C. P49,380 D. P50,769
Solution:
Assets Free Portion < Liabilities Unsecured Priority Deficiency

APFSC-FSC 15,000 < PSC-APPSC 11,400
Unpledged Assets 44,000 < Unsecured Creditors 68,000
< Priority Creditors 23,000
Total Free Assets 59,000 < 79,400 23,000 (43,400)
Squeeze
Recovery Rate = Available Assets / Unsecured Creditors
Recovery Rate = (59-23) / 79.4
Recovery Rate = 0.45
Fully Secured Creditors = 100% of amount owed FSC 118,000

Priority Creditors = 100% of amount owed to Priority Creditors 23,000
Partially Secured Creditors = 100% of APPSC + ((PSC-APPSC) x Rec. Rate) 50,769
Unsecured Creditors = 100% of amount owed to Unsecured Creditors x Rec. Rate 30,831

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CORPORATE LIQUIDATION

Assets Liabilities and Shareholders’ Equity

Total P2,574,000 Total P2,574,000

Assets Free Portion < Liabilities Unsecured Priority Deficiency

Fully Secured Creditors = 100% of amount owed FSC 594,000

Assets to be realized 597,800.00 Assets Realized 145,600.00

Assets to be realized 330,000.00 Assets Realized 420,000.00

Selling Price 420,000

Setllement Price (360,000) Supplementary Credits 510,000

How much was paid to the partially secured creditors?

Assets Free Portion < Liabilities Unsecured Priority Deficiency

Fully Secured Creditors = 100% of amount owed FSC 118,000

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