POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

College of Accountancy and Finance

CORPORATE LIQUIDATION

Statement of Affairs – is in effect a statement of financial position from a “quitting concern” point of view. The assets
are reported at their estimated realizable value instead of book value. They are reported as pledged with certain
creditors or free assets available to general creditors. The liabilities are reported at their balance sheet amounts listed
in terms of their rank as obligations preferred, secured or unsecured.

Information needed:
1. Balance Sheet
2. Supplementary information such as:
a. Estimates and Appraisals from reliable sources
b. Pledges of Assets
c. Obligations that are expected to emerge in the course of liquidation

Assets in the Statement of Affairs:

1. Assets Pledged with Fully Secured Creditors – Assets that have been pledged but that are expected to be realized
at more than the amount of the claims on which they are pledged.
2. Assets Pledged with Partially Secured Creditors – Assets that have been pledged but that are expected to be
realized at more than the amount of the claims on which they are pledged.
3. Free or Unpledged Assets – Assets that have not been pledged and are not related to individual liability terms.

Assets Side Columns:

1. Book Value of Assets
2. Name of Assets
3. Appraised Value of Assets
4. Estimated amount available for unsecured creditors
5. Estimated gain/loss on realization

Liabilities and Equity in the Statement of Affairs:

1. Preferred Creditors – Claims that must be provided in full before anything may be paid to remaining unsecured
claims (by law).
2. Fully Secured Creditors – Claims that have been pledged certain assets that are expected to realize as much or
more than the amount of the claims.
3. Partially Secured Creditors – Claims that have been pledged certain assets that are expected to realize less than
the amount of the claims.
4. Unsecured Creditors – Claims that carries no legal priority and on which there is no assets pledged.
5. Contingent Liabilities – Any contingent liabilities which are expected to develop into actual liabilities.
6. Capital – Balances summarizing the interests of owners of the business.

Liabilities and Equity Columns:

1. Book Value of Liabilities and Capital
2. Name of Liabilities and Capital
3. Amount of Unsecured Liability

Procedures:
1. Section Headings should be first be set up.
2. Each liability should be considered and reported in the appropriate liability section.
3. After all liabilities have been considered together with assets pledged on such claims, all remaining assets
represent unpledged items and may be listed as such.
4. Asset and liability data are summarized and the statement is completed.

Deficiency Statement – This statement is prepared to accompany the Statement of Affairs. It summarizes the sources
of deficiency such as:
• Losses on Realization
• Additional liabilities and liquidation expenses
• Losses to be borne by owners

PROBLEM 1
LUGENA Company is being liquidated. The following information is related to the liquidation:
1. Bonds payable amounting to P73,600 is secured by merchandise inventory with a book value of P123,000 and net
realizable value of 2/3 of the recorded amount.
2. Of the 195,600 accounts payable, P55,000 is secured by equipment with carrying value of P76,800 which is 70%
realizable.
3. Building with carrying value of P129,000 has a net realizable value of P99,000.
4. Other recorded liabilities are: accrued interest on bonds – P3,100; salaries payable – P17,400; taxes payable –
P11,600 and liquidation expenses – P8,500.
5. Cash available prior to liquidation amounts to P11,900.
6. Total assets of the company prior to liquidation amounts to P480,000. Except for prepaid expenses of P7,600 and
goodwill of P22,000 which has no value, the remaining assets have a net realizable value equivalent to 60% of the
recorded amount.
7. Total liabilities of the company prior to liquidation amounts to P380,000.
Determine the following:
a. How are the liabilities classified?
b. Gain/Loss on Realization
c. Amount Available to Unsecured Creditors
d. Percentage of Recovery
e. Amount payable to Partially Secured Creditor

PROBLEM 2
The listings of assets and liabilities of Piyupi Company on June 30, 2017 along with estimated realizable values are as
follows:
Est. Realizable
Book Values
Values
Cash 240,000 240,000
Accounts Receivable 630,000 480,000
Inventories 600,000 530,000
Equipment 450,000 180,000
Land and Building 750,000 420,000
Other Assets 30,000 0.00
TOTAL ASSETS 2,700,000

Accounts Payable 1,200,000

Notes Payable 300,000
Wages Payable 72,000
Taxes Payable 228,000
Mortgage Payable 615,000
Share Capital 900,000
Retained Earnings (615,000)
TOTAL LIAB AND EQUITY 2,700,000

Additional Information:
1. Accounts Receivable are pledged as security for the notes payable
2. The mortgage payable is secured by the Land and Building
3. Liquidating Expenses are expected to be P35,000
4. Unrecorded Liabilities amounting to P20,000 is to be recognized

Determine the following:

a. Gain/Loss on Realization
b. Fully Secured Liabilities
c. Partially Secured Liabilities
d. Unsecured Liabilities
e. Amount Available to Unsecured Creditors
f. Percentage of Recovery
g. Amount payable to Partially Secured Creditor
h. Statement of Deficiency

PROBLEM 3
The Balance Sheet of CAF Company at June 30, 217 is as follows:
Cash 400,000
Accounts Receivable 700,000
Inventories 500,000
Prepaid Rent 50,000
Land and Building 2,300,000
Machinery 600,000
Patent 450,000
TOTAL ASSETS 5,000,000

Accounts Payable 1,100,000

Wages Payable 600,000
Real Estate Tax Payable 100,000
Mortgage Payable 1,650,000
Notes Payable 550,000
Share Capital 2,000,000
Retained Earnings (Deficit) (1,000,000)
TOTAL LIAB AND EQUITY 5,000,000

Additional Information:
1. The company estimated that P630,000 is the maximum amount collectible for the accounts receivable.
2. Except for 20% of the inventory that are damaged and worth only P20,000, the cost of the other items is expected
to be recovered in full.
3. The land and building have a net realizable value of P1,700,000 and are subject to the mortgage payable.
4. The appraised value of the machinery is P200,000.
Determine the following:
a. Gain/Loss on realization
b. Amount available to Unsecured Creditors
c. Estimated settlement per peso of unsecured liabilities
d. Amount recoverable by each class of creditors

PROBLEM 4
Golden State Company is in bankruptcy and is being liquidated. The financial report was prepared before the final cash
settlement:

Cash P1,000,000

Claims:
Mortgage payable secured by equipment that was sold for P500,000 800,000
Unsecured Accounts Payable 500,000
Administrative Expenses 80,000
Salaries Payable 20,000
Interest Payable 100,000

Determine the following:

a. Show how the P1,000,000 cash will be distributed to the holders of each claim.

PROBLEM 5
PiYuPi Company provides the following balance sheet as of June 30, 2017:
Current Assets (NRV of P2,500,000) 3,200,000
PPE (NRV of P4,500,000) 7,500,000
Other Assets (NRV P200,000) 650,000
TOTAL ASSETS 11,350,000

Accounts Payable (secured by Inventories with NRV of P1,600,000) 4,600,000

Loans Payable (secured by PPE with NRV of P2,800,000) 5,000,000
Ordinary Shares 3,000,000
Retained Earnings (Deficit) (1,250,000)
TOTAL LIABILITIES AND EQUITY 11,350,000

Determine the following:

a. Amount available to Unsecured Creditors
b. Estimated Deficiency
c. Amount expected to be received by Accounts Payable Creditors

PROBLEM 6
A review of the assets and liabilities of ABC Company discloses the following:
1. A mortgage payable of P700,000 I secured by land and building valued at P1,120,000.
2. Notes Payable of P350,000 is secured by furniture and equipment at P280,000.
3. Assets other than above have estimated market value of P315,000.
4. Liabilities other than above total P840,000 which included preferred claims of P105,000.

Determine the following:

a. Estimated Percentage of Recovery

PROBLEM 7
The creditors of BSA Company agreed to the following concession in recognition of BSA’s deteriorating financial
condition:
1. Vernel Corporation, one of BSA’s suppliers, agreed to accept merchandise at its normal selling price of P1,350,000
in full satisfaction of P1,458,000 overdue accounts receivable from BSA. The cost of the merchandise to BSA was
P1,080,000. Vernel’s accounts receivable from BSA included a P135,000 allowance for doubtful accounts.
2. Philippine Prudential Bank, agreed to accept 2,000 shares of BSA’s P450 par ordinary shares with a current market
price of P900 per share in full satisfaction of P2,025,000 note and P180,000 accrued interest due from BSA. PPB has
provided a P450,000 allowance for this note.

Determine the following:

a. Total gain or loss resulting from the concession

PROBLEM 8
The following are the data presented by Jasmin Company:
Assets at Book Value 1,250,000
Assets at NRV 937,500
Liabilities at Book Value:
Fully Secured Mortgage 500,000
Unsecured Accounts and Notes Payable 562,500
Unrecorded Liabilities:
Interest on Bank Notes 3,125
Estimated administrative expenses 50,000

Determine the following:

a. Amount of Estimated Deficiency

PROBLEM 9
BSA Company is insolvent and its statement of affairs show:
Estimated gain on realization of assets 2,000,000
Estimated loss on realization of assets 2,560,000
Additional assets 1,200,000
Additional liabilities 960,000
Share Capital 12,000,000
Deficit 11,200,000

Determine the following:

a. How much is the pro-rata payment to stockholders?

TRUSTEESHIP

An independent body (trustee or receiver) is appointed by court to take over the assets of the insolvent corporation to
protect the equities and rights of all parties concerned.

Proforma Entries:

Debtor’s Book:
Trustee’s Account xxx
Allowance for Doubtful Accounts xxx
Accumulated Depreciation xxx
Current Assets xxx
Non-Current Assets xxx

Trustee’s Book:
Current Assets xxx
Non-Current Assets xxx
Allowance for Doubtful Accounts xxx
Accumulated Depreciation xxx
Debtor’s Account xxx

Note: Only assets are transferred to the books of the trustee. The original liabilities and the stockholder’s equity
accounts are left on the company records.

If the trustee is able to restore the financial solvency, the control of the assets is returned to the former owners,
HOWEVER, if solvency cannot be restored, then the corporation will be liquidated.

STATEMENT OF REALIZATION AND LIQUIDATION

It is a summary of the course of operations of a business under the administration of a trustee and involving the
realization of assets and liquidation of obligation.

ASSETS
Assets to be realized: Assets Realized:
(BV of Non-Cash Assets) (Net proceeds of assets sold)
Assets Acquired: Assets no realized:
(Additions to assets during liquidation period) (BV of unsold non-cash assets)

LIABILITIES
Liabilities liquidated: Liabilities to be liquidated:
(Paid liabilities) (BV of liabilities)
Liabilities not liquidated: Liabilities assumed:
(Unpaid liabilities) (Additional obligations incurred during
liquidation period)

REVENUES AND EXPENSE

Supplementary Charges: Supplementary Credits:
(Purchases and expenses) (Sales and other revenues)

If total debits are greater than total credits, there is loss on realization; however, if total credits are greater than
total debits, there is a gain on realization.
PROBLEM 10
Below is the summary accounts appearing in the Statement of Realization and Liquidation of PiYuPi Company:
Assets to be realized 5,200,000
Assets not realized 2,700,000
Assets realized 3,800,000
Assets acquired 1,800,000
Liabilities to be liquidated 4,200,000
Liabilities not liquidated 1,900,000
Liabilities assumed 900,000
Liabilities liquidated 2,500,000
Supplementary charges 850,000
Supplementary credits 600,000

Determine the following:

a. Gain/Loss on Realization

PROBLEM 11
Palugi Company was unable to pay its current obligations as they become due. SM Company was appointed as trustee
on January 2, 2017. Creditors and stockholders agree that an attempt should be made to rehabilitate the business
assets, pay off the creditors and distribute remaining funds to the stockholders. The trustee is authorized to take over
all the assets of Palugi Company. A statement of financial position was given to the trustee and the following business
transactions were selected.

March 31 – Sales on account, P1,050,000

April 8 – Collections of notes receivable, P75,000
May 15 – Payment of accounts payable old – P150,000

Determine the following:

a. What is the entry for the March 31 transaction in the books of SM Company?
b. What is the entry for the April 8 transaction in the books of PALUGI Company?
c. What is the entry for the May 15 transaction in the books of PALUGI Company?

PROBLEM 12
A statement of realization and liquidation has been prepared for the LUGENA Company. The totals are given below:
Assets to be realized 60,000
Assets realized 55,000
Assets acquired 40,000
Liabilities to be liquidated 80,000
Liabilities not liquidated 65,000
Liabilities assumed 50,000
Supplementary credits 110,000

Retained Earnings decreased by P12,000. The ending balance of Share Capital and Retained Earnings are P100,000 and
(P85,000) respectively.

Determine the following:

a. Beginning balance of cash

PROBLEM 13
The following data were taken from the statement of realization and liquidation of PiYuPi Company for the quarter
ended September 30, 2017:
Assets to be realized 737,500
Assets not realized ?
Assets realized 875,000
Assets acquired 880,500
Liabilities to be liquidated 1,825,000
Liabilities not liquidated 1,000,000
Liabilities assumed 770,000
Liabilities liquidated 1,595,000
Supplementary charges 620,500
Supplementary credits 845,000

The beginning balance of Share Capital and Retained Earnings are P510,000 and P148,000 respectively. The net income
for the period is P224,500.

Determine the following:

a. Assets not realized
b. Beginning balance of cash
c. Ending balance of cash
PROBLEM 14
A statement of realization and liquidation has been prepared for LIGO Company. The totals are given below:
Assets to be realized 60,000
Assets not realized 80,000
Assets acquired 40,000
Liabilities to be liquidated 80,000
Liabilities not liquidated 65,000
Liabilities assumed 50,000
Supplementary credits 110,000

Retained Earnings increased to P25,000. The beginning balance of Share Capital and Retained Earnings are P120,000
and (P35,000) respectively.

Determine the following:

a. Beginning balance of cash
b. Ending balance of cash