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CORPORATE LIQUIDATION

By Via Samantha de Austria

INSOLVENCY
 happens when the debtor corporation’s TOTAL LIABILITY > TOTAL ASSETS at fair
valuation.

CORPORATE LIQUIDATION
 process initiated by filing a voluntary petition with Securities and Exchange Commission
(SEC) by a company which is given three years from the date of approval to wind its affairs.
 SEC appoints a trustee/receiver that focuses on realization of assets and payment of
liabilities.

STATEMENT OF AFFAIRS
 Initial report that shows the available asset values and liabilities of the corporation as of a
given date.
 Its intended purpose is to provide creditors with an indication of the state of their claims at
a particular point in time.
 ASSETS – valued at current fair values
 Assets and liabilities are classified according to the rankings and priority

ASSETS LIABLITY
Pledged to fully secured creditors Fully secured creditors
Pledged to partially secured creditors Partially secured creditors
Free assets Unsecured creditors
Liability with priority

Format:
STATEMENT OF AFFAIRS

BOOK ESTIMATED FREE


VALUES FMV ASSETS
ASSETS
xx (1) Assets pledged to fully secured creditors: xx
(list)
Liabilities to fully secured creditors (xx) xx
xx (2) Assets pledged to partially secured xx -
creditors:
xx (3) Free Assets xx xx
Total Free Assets xx
Liabilities with priority (xx)
Net Free Assets xx
Estimated deficiency (to balance) xx
xx xx

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BOOK SECURED UNSECURED
VALUES AND NONPRIORITY
PRIORITY CLAIMS
CLAIMS
LIABILITIES AND STOCKHOLDER’S EQUITY
xx (1) Liabilities with priority: xx
(Admin exp of receiver, unpaid wages,
taxes)
xx (2) Fully secured creditors: xx
(list)
xx (3) Partially secured creditors: xx
(list)
Value of pledged assets: (xx) xx
xx (4) Unsecured creditors: xx
(list)
xx Stockholder’s Equity -
xx xx

Illustration:
The M Corporation, which is undergoing liquidation, has the following condensed balance
sheet as of April 1, 20x6:

Assets Liabilities and Shareholders’ Equity


Cash P 396,000 Salaries Payable P120,000
Accounts Receivable (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 Notes 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.

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M Corporation
Statement of Affairs
April 1, 20x6

BOOK ESTIMATED FREE


VALUES FMV ASSETS
ASSETS
Assets pledged to fully secured creditors:
624,000 Accounts Receivable 600,000
Liabilities to fully secured creditors:
Notes Payable (594,000) 6,000
Assets pledged to partially secured -
creditors:
120,000 Inventory 132,000
900,000 Equipment 1,050,000
1,182,000
Free Assets:
396,000 Cash 396,000
300,000 Accounts Receivable 180,000
111,000 Inventory 70,000
3,000 Prepaid Expenses -0-
120,000 Goodwill -0- 646,000
Total Free Assets 652,000
Liabilities with priority (166,000)
Net Free Assets 486,000
Estimated deficiency (to balance) 150,000
2,574,000 636,000

BOOK SECURED UNSECURED


VALUES AND NONPRIORITY
PRIORITY CLAIMS
CLAIMS
LIABILITIES AND STOCKHOLDER’S EQUITY
Liabilities with priority:
120,000 Salaries Payable 120,000
-0- Taxes Payable 21,000
-0- Trustees Expenses 25,000
166,000
Fully secured creditors:
594,000 Notes Payable 594,000
Partially secured
creditors:
140,000 Accounts payable 140,000
1,200,000 Bank Loan Payable 1,200,000
-0- Interest Payable 30,000
1,370,000

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Value of pledged
assets:
Inventory 132,000
Equipment 1,050,000 (1,182,000) 188,000
Unsecured creditors:
160,000 Accounts Payable 160,000
270,000 Bonds Payable 270,000
-0- Interest Payable 18,000 448,000
Stockholder’s
90,000 Equity -
2,574,000 636,000

ESTIMATED RECOVERY
 An estimate of how much will be received by unsecured creditors without priority for each
peso owed to them.

Net Free Assets


Estimated Recovery Percentage =
Unsecured Liabilities

The estimated recovery percentage for M Corporation will be computed as:


486,000
0.76 on one peso, or 76% =
636,000

ESTIMATED AMOUNTS TO BE RECOVERED BY CREDITORS

CLASS OF CREDITORS TOTAL COMPUTATIONS ESTIMATED


CLAIMS RECOVERY
Unsecured with priority xx 100% xx
Fully secured xx 100% xx
Partially secured xx Pledged asset + (unsecured xx
claim * % of recovery)
Unsecured without priority xx % of recovery xx
TOTALS xx xx

As illustrated above, the summary of estimated accounts to be recovered by each class of


creditors of M Corporation:

CLASS OF CREDITORS TOTAL COMPUTATIONS ESTIMATED


CLAIMS RECOVERY
Unsecured with priority 166,000 100% 166,000
Fully secured 594,000 100% 594,000
Partially secured 1,370,000 96% *1,324,880

Unsecured without priority 448,000 76% 340,480


TOTALS 2,578,000 2,425,360
*there’s a minor rounding differences.

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STATEMENT OF REALIZATION AND LIQUIDATION
 Statement that shows the gains or losses on realization of assets and a list of additional costs
associated with the liquidation.
 Composed of 3 elements: asset, income/loss transactions

Realization activities:
ASSETS (EXCEPT CASH)
Assets to be realized Assets realized
Assets acquired Assets not realized

INCOME EFFECT OF REALIZATION


Expenses and losses Revenues and gains

Liquidation activities:
LIABILITIES
Liabilities liquidated Liabilities to be liquidated
Liabilities not liquidated Liabilities incurred

INCOME EFFECT OF LIQUIDATION


Expenses and losses Revenues and gains

Format:
STATEMENT OF REALIZATION AND LIQUIDATION (Traditional)

ASSETS
Assets to be realized xxAssets realized xx
Assets acquired (new) xxAssets not realized xx
LIABILITIES
Liabilities liquidated xx Liabilities to be liquidated xx
Liabilities not liquidated xx Liabilities incurred (new) xx
INCOME (LOSS) AND SUPPLEMENTARY ITEMS
Supplementary Expense xx Supplementary Revenues xx

Illustration:

On July 1, 2016, the records of Mr. Marvin, trustee in bankruptcy for Jolay Corporation, showed
the following:

Cash P 57,400
Assets to be realized: Liabilities to be liquidated:
Furniture 70,000 Accounts payable 560,000
Building 301,000 Notes Payable 280,000
Machinery 196,000 Estate Deficit 184,400
Copyright 30,800

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During July, Mr. Marvin 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.

Jolay Corporation
Statement of Realization and Liquidation
For the month ended July 31,2016

ASSETS
Assets to be realized Assets realized
Furniture 70,000
Building 301,000 Machinery 61,600
Machinery 196,000 Copyright 84,000 145,600
Copyright 30,800 597,800
Assets acquired - - Assets not realized
Machinery 91,000
Furniture 70,000
Building 301,000 462,000
LIABILITIES
Liabilities liquidated Liabilities to be
Accounts Payable 98,000 liquidated
Notes payable 49,000 147,000 Accounts payable 560,000
Notes payable 280,000 840,000
Liabilities not Liabilities incurred - -
liquidated
Accounts Payable 462,000
Notes Payable 231,000 693,000
INCOME (LOSS) AND SUPPLEMENTARY ITEMS
Supplementary 9,100 Supplementary - -
Expense Revenues
Net Income 700
1,447,600 1,447,600

ACCOUNTING AND REPORTING FOR TRUSTEE


 Assets and liabilities are recorded at book value
 Contra assets are omitted
 Reports prepared: statement of cash receipts and disbursements and statement of
realization and liquidation
 Unrecorded assets and liabilities discovered, gains, losses, liquidation expenses are
recorded directly in the estate equity account
 Assets acquired and liabilities incurred: identified as “new”

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STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS

Cash, beginning balance xx


Add: Cash Receipts xx
Less: Cash Disbursement xx
Cash, ending balance xx
or
Stockholder’s Equity (end) xx
Add: Liabilities NOT liquidated xx
Total Liabilities and Stockholder’s equity xx
Less: Assets NOT realized xx
Cash, ending balance xx

ESTATE EQUITY (DEFICIT)


 Computed when assets are realized
 Estate Equity-beg. = (before realization) BV of Assets less BV of Liabilities

Estate equity, beginning balance xx


Adjustments xx
Adjusted balance xx
Net gain (loss) on realization: xx
Administrative expenses paid (xx) xx
Estate deficit, ending balance xx

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PROBLEMS:

1. Alay Company filed a voluntary bankruptcy petition on April 06, 2015 and the statement of
affairs reflects the following amounts:
Assets Book Carrying Amount Estimated Current Value
Assets pledged to fully Php 160,000 Php 190,000
secured creditors
Assets pledged to partially 90,000 60,000
secured creditors
Free Assets 200,000 140,000
450,000 390,000
Liabilities
Liabilities with priority 20,000
Fully secured creditors 130,000
Partially secured creditors 100,000
Unsecured creditors 260,00
510,000

Assume that the assets are converted into cash at the estimated current values and the
business is liquidated. What total amount of cash should the partially secured creditors
receive?
2. In 2016, Marsya Corp. was forced into bankruptcy and begun to liquidate. The following
selected account balances were taken from its statement of affairs:
Assets Book Value Estimated Current Value
Assets pledged to partially Php 80,000 Php 50,000
secured creditors
Total Free Assets 220,000 160,000

Liabilities Book Value Unsecured Amount


Fully secured creditors Php 16,000 Php 0
Partially secured creditors 75,000 25,000
Unsecured creditors 155,000 155,000

a. What is the total amount available for payment of claims of unsecured creditors?
b. What is the estimated amount of liquidating dividend per peso claim?
c. What is the amount of deficiency to creditors?

3. In March 2015, it was determined that it is necessary to complete the work in process of Glenn
Corp. To complete the work in process, Php 10,000 book value of raw materials and supplies
and Php 10,000 conversion cost will be required. When completed, these goods will probably
sell for approximately Php 50,000. The raw materials, which have a book value of Php 40,000,
have an estimated total realizable value of Php 20,000. What is the estimated amount that will
become available for unsecured creditors as a result of the realization of the work in process?
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4. The following selected account balances were taken from the balance sheet of Move on Corp.
as of December 31, 2016, immediately before the takeover of the trustee:
Marketable Securities P 300,000
Inventories 110,000
Land 150,000
Building 400,000
Additional information:

 Marketable securities have present value of P320,000. These securities have been pledged
to secure notes payable of P280,000.
 The estimated worth of inventories is P70,000. However, inventories with book value of
P50,000 have been pledged to secure notes payable of P60,000. The realizable value of the
inventories pledged is estimated to be P40,000.
 Land and building are estimated to have a total realizable value of P450,000. This property
is pledged to secure the mortgage payable of P250,000.

a. What is the estimated amount available for preferred claims and unsecured creditors out of
assets pledged with fully secured creditors?
b. What is the total amount of free assets?

5. The accountant of Tulo Corp. prepared a statement of affairs. Assets which there are no claims
or liens are expected to produce P700,000. Unsecured claims of all classes totaled to
P10,050,000. The following data are claims deemed outstanding:

a. Accrued salaries, P15,000.


b. Unrecorded note for P10,000, on which P600 of interest has accrued held by Laway Co.
c. A note for P30,000 secured by P40,000 receivable, estimated to be 60% collectible held by
Nganga Co.
d. A P15,000 note, on which P300 interest has accrued held by Marv Sy. Property with a book
value of P10,000 and a market value of P18,000 id pledged to guarantee payment of
principal and interest.
e. Unpaid income taxes of P35,000.
What is the amount realized by partially secured creditors?