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Chapter 6

Problem I
1. Statement of Affairs

MINER COMPANY
Statement of Affairs
May 31, 2012
Book Value
Assets
Realizable
Value
Assets Pledged with Fully Secured Creditors:
P 50,000 Notes Receivable P39,800
1,200 Accrued Interest Rec. 1,000 P 40,800

Notes Payable 40,000
Accrued Interest Pay. 800 40,800

119,000 Building 75,000
Note Payable 20,000
Accrued Interest Pay. 800 20,800 P 54,200

Assets Pledged with Partially Secured Creditors:
13,200 Equipment 4,200
Note Payable 10,000

Free Assets
6,000 Cash 6,000
61,000 Accounts Receivable 50,000
60,000 Inventory 30,000
1,100 Prepaid Insurance 400
8,500 Goodwill 0
Total Net Realizable Value 140,600
Liabilities having Priority Wages 6,000
Taxes 2,400 8,400
Net Free Assets 132,200

Estimated Deficiency to Unsecured Creditors 53,600
P 320,000 P 185,800

Book
Value

Equities

Unsecured
Liabilities Having Priority:
P 6,000 Accrued Wages P 6,000
2,400 Taxes Payable 2,400 P 8,400

Fully Secured Creditors:
60,000 Notes Payable 60,000
1,600 Accrued Interest Payable 1,600 61,600

Partially Secured Creditors:
10,000 Note Payable 10,000
Equipment 4,200 P 5,800

Unsecured Creditors:
170,000 Accounts Payable 170,000
10,000 Notes Payable 10,000

Stockholders Equity
110,000 Common Stock
( 50,000) Retained Earnings (Deficit)
P 320,000 P 185,800

2. Deficiency Statement to determine estimated deficiency to unsecured creditors:

Deficiency Account
May 31, 2012
Estimated Losses: Estimated Gains:
Accounts Receivable P 11,000 Common Stock P 110,000
Notes Receivable 10,400 Retained Earnings (50,000)
Inventory 30,000 Estimated Deficiency to
Buildings 44,000 Unsecured Creditors 53,600
Equipment 9,000
Prepaid Insurance 700
Goodwill 8,500
P113,600 P 113,600
Estimated final dividend rate to unsecured creditors is: P132,200/P185,800 = 71.15%


Problem II
1.
Down Dog Corporation
Statement of Affairs
June 30, 2014

Deficiency
Account
Book Value Assets Realizable Value (Loss/Gain)
Pledged with partially secured creditors
P165,000 Equipment-net P87,000 (78,000)
Less: Note payable and accrued interest (96,000) P 0
Unsecured amount (See below) (9,000)

Free Assets
3,000 Cash 3,000
72,000 Accounts receivable-net 48,000 (24,000)
60,000 Inventories 72,000 12,000
Total net realizable value 123,000
Less: Priority liabilities wages payable (45,000)
Total available for unsecured creditors 78,000
______ Estimated deficiency to unsecured creditors 30,000 ______
P300,000 P108,000 (90,000)

Unsecured
Book Value Equities Liabilities

Priority liabilities
P 45,000 Wages payable (assumed under
P4,650 per employee) P 45,000

Partially secured creditors
96,000 Note payable and accrued interest P 96,000
Less: Equipment pledged as security (87,000) P 9,000

Unsecured creditors
72,000 Accounts payable 72,000
27,000 Rent payable 27,000

Stockholders equity
180,000 Capital stock 180,000
(120,000) Retained earnings (deficit) ______ (120,000)
P300,000 P108,000 P 60,000
Estimated Deficiency P(30,000)

2. Estimated payments per dollar for unsecured creditors

Cash available P210,000

Distribution to partially secured and unsecured priority creditors:
Note payable and interest P87,000
Administrative expenses 24,000
Wages payable 45,000 (156,000)
Available to unsecured nonpriority creditors P 54,000

Note payable and interest (unsecured portion) P 9,000
Accounts payable 72,000
Rent payable 27,000
Unsecured nonpriority claims P108,000

(P54,000 / P108,000 = $0.50 per dollar)

Expected recovery for each class of claims
Partially secured
Note payable and interest
Secured portion P87,000
Unsecured portion (P9,000 0.50) 4,500 P91,500

Unsecured priority
Administrative expenses P24,000
Wages payable 45,000 69,000

Unsecured nonpriority
Accounts payable (P72,000 0.50 P36,000
Rent payable (P27,000 0.50) 13,500 49,500
Total payments P210,000


Problem III
Realizable value of all assets (P635,000 + P300,000 + P340,000) P1,275,000
Allocated to:
Fully secured creditors (316,000)
Partially secured creditors (300,000)
Unsecured creditors with priority (100,000)
Remainder available to general unsecured creditors P559,000

Payment rate to general unsecured creditors
(Including balance due to partially secured creditors)
P559,000 / (P1,165,000 + (P400,000 - P300,000)) 44.2%

Realizable value of assets:
Assets pledged to fully secured creditors P635,000
Assets pledged to partially secured creditors 300,000
Free assets 340,000
Total realizable value P1,275,000

Amounts to be paid to:
Fully secured creditors P316,000
Partially secured creditors [P300,000 + (0.442 P100,000)] 344,200
Unsecured creditors with priority 100,000
General unsecured creditors (0.442 P1,165,000) 514,800*
Total P1,275,000

*Rounded P130

Problem IV
Free Assets:
Current Assets ................................................................................. P 35,000
Buildings and Equipment .............................................................. 110,000
Total ........................................................................................ P145,000

Liabilities with Priority:
Administrative Expenses ................................................................ P 20,000
Salaries Payable (only P3,000 per employee) ........................... 6,000
Income Taxes ................................................................................. 8,000
Total ........................................................................................ P 34,000

Free Assets After Payment of Liabilities with Priority
(P145,000 P34,000) ...................................................................... P111,000

Unsecured Liabilities
Notes Payable (in excess of value of security) ......................... P 30,000
Accounts Payable .......................................................................... 85,000
Bonds Payable ................................................................................ 70,000
Total ........................................................................................ P185,000

Percentage of Unsecured Liabilities To Be Paid: P111,000/P185,000 = 60 %

Payment On Notes Payable:
Value of Security (land) ................................................................. P 90,000
60% of Remaining P30,000 ............................................................ 18,000
Total Collected by holders ............................................................ P108,000

Problem V
Free Assets:
Cash ........................................................................................ P30,000
Receivables (30 percent collectible) .......................................... 15,000
Inventory ........................................................................................ 39,000
Land (value in excess of secured note:
P120,000 P110,000) ................................................................. 10,000
Total ........................................................................................ P94,000

Less: Liabilities with priority
Salary payable (below maximum) ........................................ (10,000)
Free assets available ................................................................ P84,000

Unsecured Liabilities:
Accounts payable .......................................................................... P90,000
Bonds payable (less secured interest in
building: P300,000 P180,000) ................................................ 120,000
Unsecured liabilities .................................................................. P210,000

Percentage of unsecured liabilities to be paid: P84,000/P210,000 = 40%

Amounts to be paid for:
Salary payable (liability with priority to be paid
in full) ........................................................................................ P10,000
Accounts payable (unsecuredwill collect 40%
of debts of P90,000) .................................................................. P36,000
Note payable (fully secured by landwill collect
entire balance) ........................................................................ P110,000
Bonds payable (partially securedwill collect
P180,000 from building and 40 percent of the
remaining P120,000) ................................................................. P228,000

Problem VI

Class of Creditors
Total
Creditors
Claims
Total Amounts
Expected to
be Recovered
% of Total
Claims
Expected to
be Recovered
Fully secured liabilities
Partially secured liabilities
Unsecured liabilities with priority
Unsecured liabilities without priority
183,600
54,600
30,810
182,500
183,600
51,720
30,810
116,800
100.0
94.7
100.0
64.0

Problem VII

1. Total estimated proceeds P910,000
Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory) P150,000
Mortgage payable and interest (from
proceeds of land and building) 320,000 470,000
Total available to unsecured claimants. P440,000
Less distributions to unsecured claims
with priority:
Wages payable P 10,000
Taxes payable 20,000 30,000
Amount available for unsecured claims P410,000

2. Unsecured portion of notes payable and
interest (P500,000 + P30,000 P150,000) P380,000
Accounts payable 260,000
Total claims ofunsecured creditors P640,000
Dividend to Unsecured Creditors
P410,000 P640,000 = 64.1%

3. Unsecured portion of notes payable and
Interest P380,000
Dividend on unsecured amount 64.1%
Amount received on unsecured portion P243,580
Proceeds from receivables and inventory 150,000
Total Received P393,580
Dividend to note holders: P393,580 P530,000 = 74.3%

Problem VIII
1.
WILBUR CORPORATION
STATEMENT OF AFFAIRS
DECEMBER 31, 2008
Assets




Book Value


Estimated
Current
Values
Estimated
Amount
Available to
Unsecured
Claims

Estimated
Gain
(Loss) on
Realization
(1) Assets pledged with fully secured
creditors:

P 40,000 Accounts receivable (net) P 40,000
Less: 10% note payable and
interest

38,500

P 1,500


50,000 Land P 65,000 P 15,000
110,000 Plant and equipment (net) 100,000 (10,000)
P165,000
Less: Mortgages payable and
interest

(157,500)

7,500


(2) Assets pledged with partially
secured creditors:

20,000 Marketable securities P 16,000 (4,000)
Less: 10% note payable and
interest (20,800)

35,000 Inventory P 32,000 (3,000)
Less: Accounts payable (60,000)

(3) Free assets:
4,000 Cash P 4,000 4,000
35,000 Accounts receivable (net) 35,000 35,000
55,000 Inventory 50,000 50,000 (5,000)
6,000 Prepaid insurance 1,000 1,000 (5,000)
140,000 Plant and equipment (net) 60,000 60,000 (80,000)
48,000 Franchises 15,000 15,000 (33,000)

Estimated amount available P 174,000
Less: Creditors with priority (43,000)
Net available to unsecured creditors P 131,000
Estimated deficiency 45,000
P 543,000 (P 125,000)
Total unsecured debt P 176,000

2. Percentage to unsecured creditors: P131,000/P176,000 = 74.43%

Problem IX

Smith Company
Statement of Realization and Liquidation
Assets
Assets to be realized Assets Realized

Old Receivebles, net P 50,000 Old Receivbles P 28,000
Marketable Securities 20,000 New Receivbles 65,000
Old Inventory 72,000 Marketable Securities 15,000
Depreciable Assets, net 120,000 Sales of Inventory 100,000

Assets Acquired Assets Not Realized

New Receivables 100,000 Old Receivables, net 22,000
New Receivables, net 35,000
Depreciable Assets 96,000

Supplementary Items
Supplementary Charges Supplementary Credits

Old Current Payables P 31,000 Net Loss P 7,000

Liabilities
Liabilities Liquidated Liabilities to be Liquidated

Old Current Payables P 31,000 Old Current Payables P 65,000

Liabilities Not Liquidated Liabilities Incurred

Old Current Payables P 34,000 ________
P433,000 P 433,000

Problem X

Mallory Corporation
Statement of Realization and Liquidation
For the Three Months Ended July 31, 20X5
Assets

Assets Cash Non-Cash
Beginning balances assigned 5/1/X5 P 4,000 P720,000
Cash Receipts:
Collection of Accounts Receivable 60,000 (70,000)
Sale of inventory 170,000 (200,000)
Sale of land and building 20,000 (340,000)
Sale of machinery 70,000 (100,000)
Cash Disbursements:
Payment of salaries payable (60,000)
Partial payment of accounts pay. (170,000)
Partial payment of bank loan (70,000)
Ending balance P24,000 P10,000
Liabilities
Unsecured
Fully Partially With Without Owner's
Assets Secured Secured Priority Priority Equity
Beginning balances assigned
5/1/X5
P240,000 P270,000 P94,000 P 0 P120,000
Cash Receipts:
Collection of Accounts
Receivable
(10,000)
Sale of inventory (30,000)
Sale of land and building (240,000) (80,000)
Sale of machinery (30,000)
Cash Disbursements:
Payment of salaries payable (60,000)
Partial payment of accounts
pay
(180,000) 10,000
Partial payment of bank loan ________ (90,000) ________ 20,000 ________
Ending balance P 0
P
P 0
0
P34,000 P30,000 P (30,000)


Multiple Choice Problems
1. d since there is parent and subsidiary relationship, any intercompany accounts are
eliminated from consolidated point of view.

2. a - [P90,000 + P36,000 + P10,000 P45,000 = P91,000 total estimated amount available; P91,000
(P4,500 + P10,000) = P76,500 estimated amount available for unsecured, non-priority
creditors; P76,500 P90,000 = 0.85]

3. c it is a partially secured liability

4. d [(P1,110,000 P780,000) + P960,000] P210,000 = P1,080,000

5. b P25,000 + [.30 x (P75,000 P25,000)] = P40,000

6. d (P555,000 P390,000) + P480,000 = P645,000 P105,000 = P540,000

7. b P30,000 + [.30 x (P90,000 P30,000)] = P48,000

8. d

9. No requirement

10. c P60,000 + [(P120,000 + P6,000) (P30,000 + P35,000) = P121,000

11. b - P20,000 + P80,000 + [P170,000 (P150,000 + P7,000)] = P113,000 (P10,000 + P10,000)
= P93,000

12. c P93,000/P121,000 = 77% rounded.

13. a
Net Free Assets:
(P700,000 P300,000) + P70,000 + P230,000 = P700,000 P140,000 = P560,000
Total Unsecured Creditors without priority:
(P400,000 P300,000) + P600,000 = P700,000

14. c
Statement of Realization and Liquidation

Assets to be Realized. P 1,375,000 Assets Realized..P 1,200,000
Assets Acquired.. 750,000 Assets Not Realized 1,375,000
Liabilities Liquidated. 1,875,000 Liabilities to be Liquidated. 2,250,000
Liabilities Not Liquidated. 1,700,000 Liabilities Assumed.. 1,625,000
Supplementary charges/ Supplementary credits 2,800,000
debits 3,125,000

P 8,825,000 P 9,250,000

Net Gain.. P 425,000

15. c
Total Liabilities (refer to Liabilities not liquidatedNo. 14) P1,700,000
+: Stockholders Equity (P1,500,000 P500,000) 1,000,000
Total LSHE = Total Assets P 2,700,000
-: Noncash assets (refer to Assets not realized-No. 14). 1,375,000
Cash balance, ending P1,325,000

Theories
1. False 6. False 11. False 16. c 21. a 26. c 31. a
2. False 7. True 12. False 17. e 22. c 27. a 32. c
3. False 8. True 13. c 18. b 23. b 28. b 33. a
4. True 9. True 14. a 19. b 24. d 29. c 34. c
5. False 10, True 15, d 20. b 25. b 30. b 35. c


36. a 41. a 46. d
37. a 42. d 47. b
38. b 43. b 48. a
39. c 44. d 49. a
40. d 45. c 50. c