CORPORATE BANKRUPTCY

Objectives: At the end of the course, student will be able to

1) Enumerate the important provisions of the insolvency law regardingInsolvency, voluntary against involuntary insolvency, ranking of
claims,
2) Classify the assets
3) Prepare a schedule allocating the cash based on the realizable value
of all assets
4) Compute for the deficiency account, liquidation ratio, and estimate
the amounts that can be received by unsecured non priority claims.
5) Differentiate a statement of financial position from a statement of
affairs
6) Prepare a statement of affairs.
ILLUSTRATIVE PROBLEM:
A receiver was appointed on September 30, 2014, for
date, the statement of financial position showed:
Assets
Cash on Hand and In Bank
Accounts Receivable
P32,000
Less Allowance for Bad
2,000
Debts
Notes Receivable
P20,000
Accrued Interest
600
Merchandise
Prepaid Insurance
Prepaid Advertising
Building
P80,000
Less
Accumulated
21,000
Depreciation
Furniture & Fixtures
P 7,200
Less
Accumulated
1,600
Depreciation
Goodwill
Total

Greenland Inc. On this

P 2.520
30,000

20,600
29,200
2,040
1,900
59,000
5,600
4,000
P154,8
60

Equities
Accrued Wages
Accrued Property Taxes
Accounts Payable
Notes Payable
Accrued Interest Payable

P 2,800
1,810
69,800
25,000
150

Share Capital
Share Premium

P70,000
2,000
72,000
Retained
Earnings

(16,700)

P
99,560

Deficit

Total
P154,860

It is estimated that conversion of assets will realize cash in the following amounts:
Notes receivable (with accrued
P19,000
interest)
15,000
19,000
Accounts Receivable
30,000
Merchandise
4,000
Building
Furniture & Fixtures
Notes payable to PNB of P15,000 plus accrued interest are secured by
merchandise .Notes payable to BDO of P10,000 are secured by the furniture
and fixtures. Liquidation expenses will be incurred, P10,000.
Required: a) Prepare a schedule of cash allocation.
b) Determine the deficiency account value.
c) What is the liquidation ratio for the unsecured non priority
creditors?
d) What is the total estimated amount that BDO will recover from the
firm?
Schedule of allocation:
Claim
Total available
Pledged with fully secured
creditors
Pledged with partially secured
creditors
Applied against priority liabilities

Applied

15,150

15,150

10,000

4,000

10,110

9,610

Balance to
unsecured
P 6,000

Estimated
Available
P 89,520
74,370
70,370
55,760

Excess cash of P55,760 against unsecured non priority liabilities 75,800 (69,800 +
6,000)= P20,040 deficiency account
Liquidation ratio (55,760 divided by 75,800)= P.73562
Recoverable by BDO

6,000 x .73562 + P4,000= P8,413.72

HOMEWORK FOR THURSDAY TWO PRESENTERS

2. the following data were taken from the statement of affairs for Cannot
Corporation:
ASSETS:
Pledged for fully secured liabilities
(current fair value, P150,000)
Pledged for partially secured liabilities
(current fair value, P104,000)
Free assets (current fair value, P80,000)

P180,000
148,000
140,000

LIABILITIES
Unsecured liabilities with priority
Fully secured liabilities
Partially secured liabilities
Unsecured liabilities without priority

14,000
60,000
120,000
224,000

It is further estimated that liquidation cost will amount to P5,000.

Required: a) Compute the amount that will be available for unsecured
liabilities.
b) Compute for the liquidation ratio and determine the total
recoverable by the
partially secured creditors.
3. Flores Company filed for a voluntary bankruptcy and was granted by the courts
after having
submitted all the required papers and documents. Its current balance sheet
showed the following:
Cash
Investments
Accounts Receivable, net
Inventory
Prepaid Expenses
Land
Building, net
Equipment, net
Total
Notes Payable (PNB)
Accounts Payable
Accrued Expenses
Notes Payable, long term
Common Stock
Retained Earnings
Total

P2,000
15,000 Fair value of P20,000 plus P1,000
dividends already earned
23,000 Realizable value of P12,000
41,000 Realizable value of 55,000 less
cost of reconditioning of P5,000,
3,000 Cash surrender value of P1,000
100,00 Can be sold at 120% of its cost.
0
110,00 Can be sold at 90% of its book
0 value.
80,000 Can be sold at half its book value.
P374,0
00
75,000 Secured by inventory
60,000
33,000 Includes receivers fee of P10,000
and Liquidation cost of P15,000
and Wages of P8,000.
200,00 Secured by Land and Building
0
100,00
0
(94,000
)
P374,0
00

Required: a) Prepare a table of cash allocation

b) How much is the estimated cash available for the unsecured non priority
creditors?
b) How much is the deficiency amount?

c) How much is the dividend rate for the unsecured creditors without
priority?
d) How much loss will PNB incur because of this relief process