Since 1977
NATIONAL UNIVERSITY
ADVAC 1- CORPORATE LIQUIDATION
LECTURE NOTES
CORPORATE LIQUIDATION
Business failures take many forms, common one is the
inability to settle financial obligations as they become due.
If the distressed company liquidates, it enters into
bankruptcy procedures that are court administered
because of legal ramifications.
The process of corporate liquidation would include
realization of assets and the distribution of the cash
proceeds, first to the different creditors, then the balance
to stockholders, if any. Generally, the cash provided would
be less than the amount of all the liabilities so a payment
deficiency to creditors would occur. These activities are
done by a court-appointed trustee under accountability
techniques.
Actual liquidation, however, is preceded by a court-petition
for bankruptcy, voluntary, if filed by the distressed
company itself; involuntary if initiated by its creditors. The
voluntary petition is submitted to the courts for resolution
and a statement exhibiting the petitioner’s debts and
assets (at fair values) accompanies the petition. This
statement is commonly called the Statement of Affairs.
The Statement of Affairs.
It is prepared under a quitting-concern assumption and
makes the following classifications as to assets and
liabilities:
Assets:
(1) Pledged with Fully Secured Creditors – estimated cash
proceeds is equal to or more than the amount of the
secured claim.
(2) Pledged with Partially Secured Creditors – estimated
cash proceeds is less than the amount of the secured
claim.
(3) Free Asset – any asset of the entity that has not been
used to secure the payment of any of the company’s
liabilities and therefore any cash proceeds therefrom is
available to unsecured creditors.
Liabilities
(1) Secured Liabilities – that which is covered by a
collateral asset
(a) Fully-secured – the realizable value of the pledged
asset is at least equal to the amount of the claim.
(b) Partially-secured liabilities – the realizable value of
the pledged asset is less than the amount of the
claim. Every partially secured claim has a secured
portion, which is covered by the realizable value of
the collateral and an unsecured portion, that which
is not covered.
(2) Unsecured Liabilities – that which is not covered by a
pledged asset.
(a) Unsecured liabilities with priority – those that are
specified under the Bankruptcy Law that must be
paid in full ahead of any other type of unsecured
liabilities.
(b) Unsecured liabilities without priority – is any other
type of unsecured liability.
Unrecorded assets with market values are included in
the statement of affairs under free assets category and
are called contingent assets; unrecorded administrative
and liquidation expenses are categorized as unsecured
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ELLERY DE LEON
1st Semester SY 2016-2017
with priority, and are called contingent liabilities. The
statement of affairs measures in estimated terms what
payments are to be received by the different types of
creditors in the event of liquidation. A full illustration of
the Statement of Affairs is prepared for Problem 1. A
shorter schedule that could also provide meaningful
information is as follows:
Estimated cash available(Cash on Hand plus Realizable
values of all assets) Px
Less prioritized claims:
Fully secured creditors Px
Secured portion of partially-secured
Creditors x
Unsecured creditors with priority x (x)
(a) Net cash available to unsecured amount Px
Less (b) Unsecured amounts:
Unsecured portion of partially secured
Creditors Px
Unsecured creditors without priority x (x)
Estimated deficiency to creditors P(x)
The estimated recovery rate for unsecured
Amounts: (a)/(b) = ER%
Another method of estimating the amount of deficiency
to unsecured creditors without priority, using a
different set of data is as follows:
Estimated loss on sale of non-cash assets PX
Plus contingent liabilities X
Estimated gross loss PX
Less: Estimated gain on sale of non-cash
Assets PX
Plus contingent assets X (X)
(x) Estimated net loss P(X)
(y) Compare with carrying value of SHE X
IF (x) and (y) are equal amounts, available cash
covers exactly outstanding liabilities; no defi-
ciency to creditors AND no amount is
recoverable by stockholders.
IF (x) is more than (y), the peso amount
difference is an Estimated Deficiency to
creditors
IF (x) is less than (y), the peso amount
difference is an estimated amount
recoverable by Stockholders.
Accounting and Reporting by the Trustee.
Accounting would be by simple financial records and
reports detailing accountability for the custody of assets
and temporary assumption of liabilities. Assets and
liabilities taken over are recorded in the trustee’s books at
carrying values in the books of the distressed company
upon the transfer. Since the stockholders’ equity items are
not transferred, a reciprocal account, Estate Equity, is
established in the books of the trustee to balance the
accounts. In turn, a reciprocal Trustee Account is
established in the books of the distressed company in
representation of the net assets transferred out to the
responsibility of the trustee.
AFAR 2103
EXCEL PROFESSIONAL SERVICES, INC.

1. The trustee is required to prepare the following

periodic statements and reports: (a) Cash receipts and
STRAIGHT PROBLEMS

Problem 1
The following information is available on August 1, 2016, Problem 2
for HEARTBREAK COMPANY, which is having difficulty in The balance sheet of BRAVEHEART ENTERPRISES at June
paying its liabilities as they become due: 1, 2016 follows. At this date an interim trustee was
appointed by the court to assume control of BRAVEHEART’s
estate and liquidate the distressed corporation.
Carrying Amount
Cash P 32,000
Cash P 14,336
Accounts receivable, net 64,000
Accounts receivable, net, fair value
Inventories 288,000
equal to carrying amount 164,864 Land 160,000
Inventories, current fair value , Buildings, net 800,000
P64,512 pledged on P75,264 of notes Intangible assets 208,000
payable 139,776 Total P1,552,000
Machinery and equipment, net, Accounts payable P 400,000
current fair value of P241,562 Notes payable 320,000
pledged on mortgage note payable 383,488 Deferred revenue 8,000
Office supplies, current fair value of Wages payable 24,000
P8,960 7,168 Mortgage note payable 640,000
Wages payable 20,787 Capital stock 320,000
Taxes payable 4,301 Retained earnings, deficit (160,000)
Accounts payable 215,040 Total P1,552,000
Notes payable, P75,264 of which is
secured by inventories 143,360 Additional information:
Mortgage note payable 180,634 1. The land and the buildings are pledged as security for
Common stock, P10 par 358,400 the mortgage payable.
Retained earnings, deficit 212,890 2. In January, 2016, BRAVEHEART received P8,000 from
a customer as payment in advance for merchandise
that is no longer marketed and thus can no longer be
provided.
Additional information: 3. Activities of the trustee during June are summarized as
(1) Estimated liability to the trustee is P93,184. follows:
(2) A delivery van previously given to the supervisor was a. P57,600 is collected on the receivables.
returned to the company, fair market value, P89,600. b. Inventories are sold for P155,200.
c. Land and buildings bring total of P800,000.
REQUIRED: d. Nothing is realized from the intangible assets.
a. Prepare a statement of affairs as of August 1, 2016. e. Administrative expenses of P65,600 are incurred
b. Compute the estimated recoverable amounts to the by the trustee.
different types of creditors in the event of liquidation.
c. Prepare a statement of deficiency to unsecured REQUIRED:
creditors. Prepare journal entries in the books of the trustee and in
the books of the distressed company for the above
transactions.

MULTIPLE CHOICE

The following were taken from the statement of affairs of Other assets 80,000
HARASSED COMPANY. Liabilities with priority 42,000
Assets pledged with fully secured P71,000 Unsecured creditors 200,000
creditors 2. In the event of liquidation at this point, how much is
Assets pledged with partially secured 12,500 the estimated amount recoverable by partially-secured
creditors creditors?
Free assets 11,000 a. P130,000 c. P 74,000
Preferred creditors 3,000 b. P 50,000 d. P200,000
Fully secured creditors 69,000
Partially secured creditors 20,000 The following information is available concerning
Unsecured creditors without priority 18,000 INSOLVENT, INC. on the date the company entered
1. The estimated deficiency to unsecured creditors is bankruptcy proceedings:
a. P 5,000 c. P15,500
b. P12,500 d. P14,500 Account Balance per Books
Cash P3,661
INSOLBENT, INC. has had severe financial difficulties and Accounts receivable 66,893
is considering the possibility of liquidation. At this time, Inventory 35,840
the distressed company has the following assets (stated at Prepaid expenses 550
net realizable value) and liabilities: Buildings, net 75,520
Assets (pledged against debts of P 116,000 Equipment, net 7,168
P70,000) Goodwill 7,232
Assets (pledged against debts of 50,000 Wages payable (3,200)
P130,000)

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www.prtc.com.ph AFAR 2103
EXCEL PROFESSIONAL SERVICES, INC.

Taxes payable (2,317)  JOG Office Supplies has an unsecured claim of P4,800
Accounts payable (101,120) that was timely filed.
Notes payable (19,392)  Nanstar Electric Company has an unsecured claim of
Common stock (92,160) P16,000 that was timely filed.
Retained earnings, Deficit 21,325  Liquid Corporation is owed P80,000 in a loan contract
secured by KAMILANG’s notes receivable which realized
Inventory with a book value of P25,600 is security for P96,000.
notes of P12,800. The other notes are secured by the  Decoy Publications has a claim of P25,600, which is
equipment. secured by KAMILANG’s inventory that was valued and
Expected realizable values of the assets are: sold, in bankruptcy, for P3,200. The claim was timely
filed.
Accounts receivable P56,448
Inventory 23,680
6. Calculate the total amount recoverable by partially-
Buildings 28,160 secured creditors:
Equipment 2,560 a. P0 c. P130,400
3. What is the estimated deficiency to unsecured b. P10,400 d. P 19,200
creditors?
a. P 11,520 c. P 92,800 7. Calculate the total amount recoverable by unsecured
b. P 83,840 d. P101,120 creditors with priority:
a. P 80,000 c. P130,400
Items 4 and 5 are based on the following: b. P 10,400 d. P 19,200
Because of inability to pay its debts, the WHAHAPEND
MANUFACTURING COMPANY has been forced into bankruptcy 8. Calculate the total amount recoverable by fully secured
as of April 30, 2016. The balance sheet on that date shows: creditors:
ASSETS a. P 80,000 c. P130,400
Cash P 4,320 b. P 5,200 d. P 19,200
Accounts Receivable 62,960
Notes Receivable 29,600 9. Calculate the total amount recoverable by unsecured
Inventories 140,560 creditors without priority:
Prepaid expenses 1,520 a. P0 c. P14,400
Land and building 98,000 b. P10,400 d. P 19,200
Equipment 78,080
P 415,040 A distressed corporation is to be liquidated and has the
LIABILITIES following liabilities:
Accounts payable P 84,000 Income taxes P 16,000
Notes payable 106,000 Notes payable, secured by land 240,000
Accrued wages 2,960 Accounts payable 166,000
Accrued taxes 7,440 Salary payable, evenly to two employees 12,000
Mortgage bond payable 144,000 Bonds payable 140,000
Common stock – P20 par 120,000 Administrative expenses for liquidation 40,000
Retained earnings (49,360)
P415,040 The said company has the following assets:
Additional information: Book value Fair value
a. Accounts receivable of P27,120 and notes receivable Current assets P 128,000 P 67,600
of P20,000 are expected to be collectible. The good Land 160,000 180,000
notes are pledged to P24,000 of the notes payable. Building and equipment 160,000 220,000
b. Inventories are expected to bring in P72,160 when
sold under bankruptcy condition. 10. How much will the holders of notes payable collect
c. Land and buildings have an appraised value of following the liquidation?
152,000. they serve as security on the bonds. a. P216,000 c. P166,000
d. The current value of the equipment, net of disposal b. P180,000 d. P240,000
cost is P14,400.
The GLOOMY COMPANY has the following data in connection
4. What is the estimated payment to all creditors? with its bankruptcy petition with the Securities and Exchange
a. P 164,000 c. P 190,000 Commission at the end of 2016.
b. P 344,400 d. P 290,000
Liabilities without priority P 460,000
5. Calculate the estimated total amount recoverable on the Liabilities with priority 220,000
notes payable.
a. P 72,080 c. P 22,720 Secured liabilities
b. P106,000 d. P 78,480 Debt 1, P420,000; value of pledged asset P 360,000
Debt 2, P340,000, value of pledged asset P 200,000
KAMILANG INC. a closely-held corporation was undergoing Debt 3, P240,000, value of pledged asset P 280,000
liquidation. The total cash value of KAMILANG’s bankruptcy
estate after the sale of all assets and payment of The company also has a number of other assets that are not
administrative expenses is P240,000. pledged in any way. The creditors holding Debt 2 want to
receive at least P284,000.
KAMILANG has the following creditors: 11. For how much do these free assets have to be sold so
 Fracon Bank is owed P120,000 on a mortgage loan that Debt 2 would receive exactly P284,000?
secured by KAMILANG’s real property. The property was a. P 616,000 c. P680,000
valued at and sold, in bankruptcy, for P112,000. b. P 396,000 d. P576,000
 The BUREAU of INTERNAL REVENUE has a P19,200
recorded judgment for unpaid corporate income tax.

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