CHAPTER 5 BANKRUPTCY

Bankruptcy It occurs in two circumstances: 1. Creditors of the firm appealed to the bankruptcy court because the company cannot afford to pay. 2. Firm / Company asked the court to declare bankruptcy because of not able to pay off the debt. - the court will issue a "Receiving Order" to the company and the company is required to provide a Statement of Affairs after having been declared bankrupt.

Deficiency Account The aim is to show how prepared the bankruptcy deficiencies exist and explain the amount established in the statement of affairs. Lack of balance in the account of the shortage must be equal to the shortage in the Statement of Affairs.

Statement of Affair as at.. BV Unsecured Creditor: -Bill payable -family debt Fully Secured Creditor: Secured on. Surplus Partially secured Creditor: Secured on. Cut off contra Discount Liability Priority Creditor: -accrued -socso/kwsp RV Fixed Asset -Machine -Land -Building Current Asset -Debtor -Stock -Cash -Surplus -Priority Creditor Deficiency xx xx BV xx xx xx RV xx xx xx

xx xx

(xx) (xx)(a)

xx xx

xx xx xx xx(a) xx(b) xx

(xx)

xx xx xx(b)

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Deficiency Account Capital Profit Personal Asset Increase in Asset Decrease in Liability Deficiency xx xx xx xx xx xx xx Drawing Loss Decrease in asset Increase in liability Bill payable/discount xx xx xx xx xx xx

QUESTION 1 En. Baba, Enterprise Fiza owners start a business on 1.1.1999 with a capital of RM67200. Net profits earned from 1999 to 2001 each of RM10400, RM8800 and RM6000. While from 2002 to 2003 the company suffered losses of their respective RM2800 and RM800. Drawings made by Mr. Baba from 1999 to 2003 were averaged by RM4400 per year. On 31/12/2003, a receiving order made by the creditors Fiza Enterprise. The following information relating to the Enterprise Fiza on 12/31/2003: RM 40000 24000 960 6400 8000 24000 4000 12000 1200 10000 700 11100 160

Unsecured creditors Half Unsecured Creditors (Secured on the building ) Accrued wages and salaries Bills payable, discounted and expected value (Expected to rank ) Buildings (secured ) Equipment (Cost RM70400) is estimated to realize Vehicles (cost RM16000) is estimated to realize Receivables Transactions: Good Doubtful (RM4000) is estimated to be realize Bad Office equipment (cost RM1600) is estimated to realize Stocks of goods (cost RM16000) is estimated to realize Cash on hand

You are required to provide a Statement of Affairs and Deficiency Account.

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Answer Q1: Statement of Affair as at 31 December 2003 BV Unsecured creditors Partially Secured: Secured on the building (-)Buildings RV 40000 Equipment Vehicles Office equipment Stock Cash Debtor: Good Doubtful Bad Priority creditor Deficiency BV 70400 16000 1600 16000 RV 24000 4000 700 11100 160 12000 1200 (960) 10200

24000 (8000) 16000

Priority Creditor: Accrued wages and salaries

4000 10000

960

Deficiency Account Capital Profit -1999 -2000 -2001 SOA 67200 10400 8800 6000 10200 Loss -2002 -2003 Drawing Equipment Vehicles Office equipment Stock Debtor: Doubtful Bad 102600 2800 800 22000 46400 12000 900 4900 2800 10000 102600

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QUESTION 2 The following information regarding the Company Kathy City: Capital Profit in years 1 Loss of years 2 Loss of years 3 Drawings for a period of 3 years (7500.00 per year) Court costs (lost) Unsecured creditors: Bills payable General debt Business debt Fully secured creditor (charge is estimated to generate RM9, 000) Liabilities on bills discounted (expected to produce RM53.51) Creditors (rent arrears) Wages and salaries Cash and bank Stock (estimated to produce RM2500) Furniture (estimated to generate RM600) Equipment (estimated to generate RM220) Good Debt Doubtful debts (estimated half will be collected) Bad debts Bills of exchange RM 7,000.00 1,680.35 869.53 662.43 2,250.00 5,550.00 1,856.75 128.84 9,037.29 8,000.00 557.73 100.00 122.73 70.92 4,060.91 1,080.64 450.53 2,678.77 526.58 487.74 237.91

Required to provide: Statement of Affairs and Deficiency Account. Answer Q2: Statement of Affair as at 31 December 2003 BV Unsecured creditors: Bills payable General debt Business debt Fully Secured Secured Surplus Liability (discount) Priority Creditor: Creditors (rent arrears) Wages and salaries 8,000.00 9,000.00 (1000.00) 504.23 RV 1,856.75 128.84 9,037.29 Furniture Equipment Bills of exchange Stock Cash Debtor: Good Doubtful Bad Priority creditor Deficiency BV 1,080.64 450.53 4,060.91 RV 600 220 237.91 2500 70.92 2,678.77 263.29 (222.73) 4,178.95

526.58 487.74

100.00 122.73 222.73

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Deficiency Account Capital Profit year 1 7000.00 1,680.35 Loss year 2 -year 3 Drawing Furniture Equipment Stock Liability (discount) Court costs (lost) Debtor: Doubtful Bad 869.53 662.43 2,250.00 480.64 230.53 1,560.91 504.23 5,550.00 263.29 487.74 12,859.30

SOA

4,178.95

12,859.30

QUESTION 3 HBH ltd is facing financial problems because of lower sales. Major shareholders and creditors have urged the company to show the financial budget of the dissolution of the company.

Balance sheet as at 31 December 2009 Non current asset Issued and paid up capital Land 50000 Shares Building 160000 Retained earnings Machine 184000 Acc.dep 52000 Long term liabilities 132000 Bank loan Current Asset Account receivable (allotment 4000) Inventory Cash Current liabilities Account payable Notes payable Wages Tax Interest on loan

230000 (127000)

168000

82000 142000 28000 594000

132000 180000 6000 3000 2000 594000

Additional Information: 1. RM40000 a number of accounts receivable is secured to the notes payable. 2. Inventories at book value RM30000 expected to be sold to customers with 20% mark-ups, business sales involve the cost of RM2000. The remaining inventory is expected to be sold at RM52000 3. Land and buildings are secured on loans and interest. Land and buildings are expected to be sold at RM220000 4. Machinery and equipment realizable value RM70000

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Required to provide: Statement of Affairs and Deficiency Account. Answer Q3:

Statement of Affair as at 31 December 2009 BV Account payable Partially Secured: Notes payable Account receivable Fully secured: Loan Land and building Surplus RV 132000 BV RV Machinery and equipment 132000 70000 Inventory 30000 36000 112000 52000 Account receivable 82000 38000 Cash 28000 Surplus Priority creditor Deficiency 50000 (11000) 9000

180000 (40000) 140000 170000 (220000) (50000)

Priority Creditor: Wages Tax Accrued expenses

6000 3000 2000 11000

Deficiency Account Capital Inventory Land and building SOA 230000 6000 10000 9000 255000 Retained earnings Machine Stock Account receivable Accrued expenses 127000 62000 60000 4000 2000 255000

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QUESTION 4 Pak Kadok business has experienced a serious bankruptcy. The following information is derived from his business books at 31 December 2007: RM 60000 18000 60000 80000 4000 14000 2800 400 800 30000 64000 4400 1600 100 140100

Unsecured creditors Fully secured creditor (collateral with the machine at a cost of RM20, 000) Fully secured creditors (mortgage with a truck at a cost of RM70, 000) Part of the secured creditors (mortgage the land to RM60, 000) Creditor priority Contingent liabilities Accounts receivable: Good amount Doubtful amount (expected to earn 50% of the disputed amount) Bad amount Office equipment (net realizable value of RM20, 000) Inventories (net realizable value of RM56, 000) Furniture (realizable value of RM1, 000) Cash Bank Capital Profit / (Loss) 2004 profit 2005 profit 2006 loss 2007 loss Drawings for a period of 4 years old (RM16, 000 per annum)

20000 16000 (60000) (20000) 64000

Required: a) Statement of Affairs as at 31 December 2007. b) Deficiency Account.

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Answer Q4:

Statement of Affair as at 31 December 2007 BV Unsecured creditor Partially Secured (-)land 80000 (60000) 20000 Fully secured Machine Surplus Fully secured Truck Surplus Contingent liabilities Priority Creditor 4000 18000 (20000) (2000) 60000 (70000) (10000) 14000 RV 60000 BV RV 30000 20000 64000 56000 4400 1000 1600

Office equipment Inventory Furniture Cash Bank A/c receiveble: Good Doubtful Bad Surplus Surplus Priority creditor Deficiency

400 800

2800 200

2000 10000 (4000) 4300

Deficiency Account Capital Profit 2004 2005 SOA 140100 20000 16000 4300 Loss 2006 2007 Drawing Contingent liabilities A/c receivable: Doubtful Bad Office equipment Furniture Inventory 60000 20000 64000 14000 200 800 10000 3400 8000 180400

180400

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