Imi.03 Corporate Liquidation

SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY General Luna Road, Baguio City Philippines 2600 Telefax No.: (074) 442-3071Website: www.ubaguio.edu

E-mail Address: [email protected]

REVIEW HANDOUTS AND MATERIALS SEMESTER

1st SEMESTER

SCHOOL YEAR

2019-2020

SUBJECT

ADVANCED FINANCIAL ACCOUNTING AND REPORTING

HANDOUT #

IMI - 003

TOPIC

Corporate Liquidation

Basic Reports Prepared in Corporate Liquidation 1. Statement of Affairs. This statement is prepared as of a given point in time for a business enterprise entering into the stage of liquidation. The purpose of this statement is to display the assets and liabilities and of the debtor enterprise from a liquidation viewpoint, because liquidation is the outcome of the bankruptcy proceedings. Thus, assets displayed in the statement of affairs are value at current fair values; carrying amounts are presented on a memorandum basis. 2. Statement of Realization and Liquidation. This is an activity statement that is intended to show progress, i.e., actual transactions toward the liquidation of a debtor’s estate. Its original purpose is to inform bankruptcy court and interested creditors of the accomplishments of the trustee. The Statement of Realization and Liquidation differs from the Statement of Affairs in the following respects: 1. The statement of realization and liquidation reports the actual liquidation results. In contrast, the statement of affairs is of a pro-forms nature and is based on estimates rather than actual results. 2. The statement of realization and liquidation provides an ongoing reporting of the trustee’s activities and is update throughout the liquidating process. The statement of affairs is a summary of the estimated results of a completed liquidation.

For Discussion: The PFRS are applicable only to entities which are of “going concern”. Accordingly, the measurement bases prescribed in the Conceptual Framework and in the PFRS do not apply to liquidating entities. For entities undergoing liquidation, the appropriate measurement basis is realizable value. For asset, realizable value is estimated selling price less estimated cost to sell. For liabilities, realizable value is the expected net settlement amount. Formulas: Estimated Deficiency = Assets at realizable value less Liabilities at realizable

Estimated Recover percentage = Net free assets / Total Unsecured without priority Total assets at realizable values Less: Unsecured creditors with priority Fully secured creditors

XX (XX) (XX)

Realizable value of asset pledged to partially Secured Asset

(XX)

Net Free Assets

XX

Unsecured Creditors without priority Plus: Deficiency of assets pledged to partially secured

XX XX

Total unsecured liabilities without priority

XX

Debits Assets to be realized, excluding cash Assets acquired Liabilities liquidated Liabilities not liquidated Supplementary expenses Loss I.

Creditors Assets realized Assets not realized Liabilities to be liquidated Liabilities assumed Supplementary Income Gain

The unsecured creditors of Clauie Corporation filed a petition on July 1, 2019 to force Clauie Corporation into bankruptcy. The court order for relief was granted on July 10 at which time in interim trustee was appointed to supervise liquidation of the estate. A listing of assets and liabilities of Insolve Corporation as of July 10, 2019, along with estimated realizable values, is a follows: Assets

Book Value

Cash Accounts receivable allowance for Bad debts

P61,400 250,000 (20,000)

Inventories

420,000

Prepaid expenses Investments Land Buildings (net)

40,000 180,000 210,000 260,000

Machinery and equipment (net) Goodwill Total Assets Liabilities and Equity Accounts Payable Wages Payable Notes Payable Accrued Interestnotes Mortgage payable, secured by Land and buildings

220,000 200,000 P1,821,400 P670,000 3,400 160,000 5,000 400,000

Estimated Realizable Values P61,400 15% of the accounts receivables is estimated to be uncollectible Estimated selling price, P340,000 which will require additional costs of P50,000 ? 110,000 An offer of P500,000 has been received for land and buildings P53,900 ?

Capital stock 800,000 Additional paid-in 80,000 capital Deficit (297,000) Total Liability & 1,821,400 Equity Additional Information: a. Patents completely written-off the books in past years but with a realizable value of P10,000 b. The boos do not show the following accruals (unrecorded expenses/additional liabilities) Taxes………………………………..P16,400 Interest on mortgage………..10,000 c. The investment have been pledged as security for holder of the notes payable. d. The trustee fees and other cost of liquidation the estate are estimated to be P60,000 Determine: 1. The total free assets should be: a. P1,831,400 c. P717,800 b. 1,821,400 d. 638,000 2. The net free assets should be: a. P717,800 c.P638,000 b. 698,000 d. 628,000 3. The estimated deficiency to unsecured creditors should be: a. P87,000 c.P27,000 b. 47,800 d. 7,200 4. The expected recovery percentage of unsecured creditors should be: a. 96.00% c.88.00% b. 95.00% d.86.62% 5. The estimated payment to creditors should be: Fully Secured Partially With Without Secured Priority Priority a. P410,000 P110,000 P79,800 P638,000 b. 500,000 158,400 60,000 589,600 c. 410,000 165,000 79,800 670,000 d. 410,000 158,400 79,800 589,600 6. The estimated payment to creditors should be: a. P1,324,800 c. P1,264,800 b. 1,308,000 d. 1,237,800 7. The estimated net gain or loss on assets realization should be: a. P583,600 c.P670,000 b. 593,600 d.680,000 Assets

Secured liab

Unsercured liab

Free assets

Cash

61,400.00

61,400.00

A/R

212,500.00

212,500.00

Inventories

290,000.00

290,000.00

Prepaid expenses

-

Investments

110,000.00

110,000.00

Land and Building Machinery and Equipment

500,000.00

410,000.00

53,900.00

55,000.00

90,000.00 53,900.00

Goodwill

-

-

Patent

10,000.00

10,000.00

Total Free Assets

1,237,800.00

717,800.00 16,400.00 60,000.00 3,400.00

520,000.00

Accounts Payable

55,000.00

Taxes Administrative Salaries

670,000.00

638,000.00 2.C

725,000.00

87,000.00

3.A

638,000.00

0.88

4.C 5.A 6.D

1,821,400.00 1,237,800.00 II.

1.C

583,600.00 7.A

Parcinic Dissolved Corporation filed a voluntary petition for bankruptcy on January 2019. On March 31, 2019, the trustee provided the following information about the corporation’s financial affairs: Assets:

Book Value

Cash Accounts Receivable – net Inventories Plant assets – net Total Assets

P40,000 200,000

Liabilities: Liabilities for priority claims Accounts payableunsecured Notes Payable, secured by Accounts receivable Mortgage payable secured by all plant assets Total liabilities

300,000 500,000 1,040,000

Estimated Realizable Values P40,000 150,000 140,000 560,000

P160,000 300,000 200,000 440,000 1,100,000

1. The amount expected to be available for unsecured claims without priority net free assets: a. P300,000 b. 580,000

c. P140,000 d. 310,000

2. The expected recovery per peso of unsecured creditors: a. P.215 b. .223

c.P.415 d..400

3. The estimated payment to creditors: a. P730,000

c. P770,000

b. 45,000

d.890,000

II. Assets Cash A/R Inventories Plant assets Total Free Assets

40,000 150,000 140,000 560,000

Total Net Free assets Accounts Payable

890,000

Free Secured liab Unsercured liab assets 40,000 150,000 50,000 0 140,000 440,000 120,000 300,000 590,000

50,000 300,000 350,000

III.

Priority -160000 claims 140,000 1.C 0.4 2.D 730,000 3.A

III. The following information was available on March 31, 2019 for Bankrupt Corporation, which they cannot pay their liabilities when they are due:

Cash Trade accounts receivable (net): Current fair value equal to carrying amount Inventories: Net realizable value, P72,000; pledged on notes payable Plant assets: Current fair value, P269,600; pledged on mortgage payable Accumulated depreciation of plant assets Supplies: Current fair value, P6,000 Wages payable, all earned during March Property taxes payable Trade accounts payable Notes payable, P84,000 secured by Inventories Mortgage payable, including accrued interest of P1,600 Common stock, P5 par Deficit

Carrying Amounts P16,000 184,000 156,000 536,000 108,000 8,000 23,200 4,800 240,000 160,000 201,600 400,000 237,600

Determine: 1. The estimated losses on realization of assets: a. P 0 c. P158,400 b. 84,000 d. 244,400 2. The estimated gains on realization of assets: a. P0 b. 84,000

c. P158,400 d. 244,400

3. The expected recovery percentage of unsecured creditors: a. 75% b. 68%

c. 78% d. 98%

4. The estimated deficiency to unsecured creditors:

a. P86,000 b. 82,000

c.P 70,000 d. 54,000

Assets Cash Trade A/R inventories Plant Assets Supplies Book value 1.D 2.A

Secured liab 16,000 184,000 72,000 269,600 6,000 547,600 792000 244,400

Unsercured liab

72,000 201600 273,600

246,000 240,000 70,000 C 316,000 0.77848101 C

Trade AP

IV.

Free assets 16,000 184,000 76000 0 68,000 6,000 76,000 274,000 -23200 Wages -4800 Taxes

The Liquid Company had a very unstable financial condition caused by a Deficiency of liquid assets. On February 4, 2019, The following information was available:

Cash Assets Not Realized: Accounts Receivable Merchandise inventory Investment in common stock Land Buildings Machinery and equipment Liabilities Not Liquidated: Notes Payable Accounts Payable Salaries and Wages payable Taxes payable Estate deficit

P112,00 80,000 160,000 26,400 100,000 60,000 48,000 P244,000 288,000 40,000 180,000 (173,600)

During the six-month period ending July 31, 2019, the trustee sold the Investment in Common Stock for P26,000, realized P84,000 for the accounts receivable, sold the merchandise for P152,000, and paidoff P26,000 of the bank loan and all liabilities with priorities (salaries, and wages payable taxes payable) as well as P7,440 for estate administration expenses. Determine: 1. The estate deficit, ending ( July 31, 2019) should be: a. P161,760 b. P178,000

c. P185,440 d. P189,440

2. The net (gain) loss or realization and liquidation should be: a. P11,840 loss b. P1,840 gain

c. P15,840 loss d.P4,400 loss

3. The cash balance , ending (July 31, 2019) should be:

a. Zero b. P185,440

c. P188,000 d. 292,560

Assets to be Realized A/R MI Investment in C/S Land Bldgs. Machinery and Eq.

Assets Realized 80,000 Investment in C/S 26,000 160,000 A/R 84,000 26,400 MI 152,000 100,000 60,000 48,000 Assets Not Realized Land 100,000 Bldgs. 60,000 Machinery and Assets Acquired: Eq. 48,000 None 0 Liabilities Liquidated Liabilities to be liquidated Bank Loan 26,000 Notes Payable 244,000 Salaries and Wages 40,000 Accounts Payable 288,000 Salaries and Taxes Payable 8,000 Wages 40,000 Taxes Payable 8,000 Liabilities not Liquidated Bank Loans 180,000 Notes Payable 244,000 Accounts Payable 288,000 Bank Loans 154,000 Administrative Exp. Total

7,440 1,241,840 Beg. Deficit

Beg. Cash Realized assets Liquidated Liab Administrative exp Ending Cash V.

1,230,000 11,840 2.A 173,600 185,440 1.C 112,000 262,000 -74,000 -7,440 292,560 3.D

Bacolod Company is experiencing financial problems which resulted to ultimate bankruptcy. The statement of financial position of the entity before liquidation is presented below:



Cash

200,000

Inventory

600,000

Land

400,000

Income tax payable Salaries payable Note payable Mortgage payable Accounts payable Contributed capital Deficit

400,000 600,000 1,600,000 200,000 800,000 1,000,000 (3,400,000)

The note payable is secured by the inventory with net realizable value of P500,000.



The mortgage payable is secured by the land with fair value of P240,000.

1. What is the amount received by the holder of the note payable at the end of corporate liquidation? A. B. C. D.

640,000 600,000 500,000 520,000

2. What is the amount received by the holder of the mortgage payable at the end of corporate liquidation? A. B. C. D.

240,000 400,000 300,000 200,000

3. What is the amount received by the employees at the end of corporate liquidation concerning their salaries? A. B. C. D.

Cash Inventory Land

200,000 240,000 144,000 600,000 Free Assets Secured liab Unsercured liab assets 200,000 200,000 500,000 500,000 1100000 0 240,000 200,000 40,000

C D B

Income -400,000 tax -600,000 Salaries 0 ex -760,000