AFAR 2- Corporate Liquidation & Joint Arrangements

Corporate Liquidation:
The following information is available concerning INSOLVENT, INC. on the date the company entered
bankruptcy proceedings:

Account Balance per Books

Cash 3,661
Accounts Receivable 66,893
Inventory 35,840
Prepaid expenses 550
Building, net 75,520
Equipment, net 7,168
Goodwill 7,232
Wages Payable (3,200)
Taxes Payable (2,317)
Accounts Payable (101,120)
Note Payable (19,392)
Common Stock (92,160)
Retained Earnings, Deficit 21,325

Inventory with a book value of 25,600 is security for notes of 12,800. The other notes are secured by the
equipment.

Expected realizable values of the assets are:

Accounts Receivable 56,448

Inventory 23,680
Buildings 28,160
Equipment 2,560

1. What is the estimated deficiency to unsecured creditors?

a. 11,520 c. 92,800
b. 83,840 d. 101,120

Because of inability to pay its debts, the WHAHAPEND MANUFACTURING COMPANY has been forced
into bankruptcy as of April 30, 2019. The balance sheet on that date shows:

ASSETS
Cash 4,320
Accounts Receivable 62,960
Notes Receivable 29,600
Inventories 140,560
 Prepaid Expenses 1,520
Land and Building 98,000
Equipment 78,080

LIABILITIES AND EQUITY

Accounts Payable 84,000
Notes Payable 106,000
Accrued Wages 2,960
Accrued Taxes 7,440
Mortgage Bond Payable 144,000
Common Stock – 20 par (49,360)

Additional Information:
a. Accounts receivable of 27,120 and notes receivable of 20,000 are expected to be collectible.
The good notes are pledged to 24,000 of the notes payable.
b. Inventories are expected to bring in 72,160 when sold under bankruptcy condition.
c. Land and Buildings have an appraised value of 152,000. They serve as security on bonds.
d. The current value of equipment, net of disposal cost is 14,400.

2. What is the estimated payment to all creditors?

a. 164,000 c. 190,000
b. 344,400 d. 290,000
3. Calculate the estimated total amount recoverable on the notes payable.
a. 72,080 c. 22,720
b. 106,000 d. 78,480

KAMILANG INC. a closely-held corporation was undergoing liquidation. The total cash value of
KAMILANG’s bankruptcy estate after the sale of all aseets and payment of administrative expenses is
240,000.
KAMILANG has the following creditors:
* Fracon Bank is owed 120,000 on a mortgage loan secured by KAMILANG’s real property.
The property was valued at and sold, in bankruptcy, for 112,000.
* The Bureau of Internal Revenue has a 19,200 recorded judgment for unpaid corporate income
tax. * JOG office supplies has an unsecured claim of 4,800 that was timely filed.
* Nanstar Electric Company has an unsecured claim of 16,000 that was timely filed.
* Liquid Corporation is owed 80,000 in a loan contract secured by KAMILANG’s notes receivable
which realized by 96,000

* Decoy publications has a claim of 25,60, which is secured by KAMILANG’s inventory that was
valued and sold, in bankruptcy, for 3,200. The claim was timely filed.

4. Calculate the total amount recoverable by partially-secured creditors:

a. 0 c. 130,400
b. 10,400 d. 19,200
5. Calculate the total amount recoverable by unsecured creditors with priority:
a. 80,000 c. 130,400
 b. 10,400 d. 19,200
6. Calculate the total amount recoverable by fully secured creditors:
a. 80,000 c. 130,400
b. 5,200 d. 19,200
7. Calculate the total amount recoverable by unsecured creditors without priority:
a. 0 c. 14,400
b. 10,400 d. 19,200

A distressed corporation is to be liquidated and has the following liabilities:

Income taxes 16,000
Notes payable, secured by land 240,000
Accounts payable 166,000
Salary payable 12,000
Bonds payable 140,000
Administrative expenses for liquidation 40,000

The said company has the following assets:

Book Value Fair Value

Current Assets 128,000 67,600
Land 160,000 180,000
Building and Equipment 160,000 220,000

8. How much will the holders of notes payable collect following the liquidation?
a. 216,000 c. 166,000
b. 180,000 d. 240,000

The GLOOMY COMPANY has the following data in connection with its bankruptcy petition with the
Securities and Exchange Commission at the end of 2019.

Liabilities without priority 460,000

Liabilities with priority 220,000

Secured Liabilities
Debt 1, 420,000; value of pledged asset 360,000
Debt 2, 340,000; value of pledged asset 200,000
Debt 3, 240,000; value of pledged asset 280,000

The company also has a number of other assets that are not pledged in any way. The creditors holding
Debt 2 want to receive at least 284,000.

9. For how much do these free assets have to be sold so that Debt 2 would receive exactly
284,000?
a. 616,000 c. 680,000
b. 396,000 d. 576,000

HARDSHIPS, INC. is undergoing liquidation since August 1, 2019. Five months later, on December 31,
2019, its condensed realization and liquidation statement shows the following:
 ASSETS:
To be realized 2,200,000
Acquired 1,200,000
Realized 1,920,000
Not realized 2,200,000
LIABILITIES:
Liquidated 3,000,000
Not liquidated 2,720,000
To be liquidated 3,600,000
Assumed 2,600,000
SUPPLEMENTARY:
Charges 5,000,000
Credits 4,680,000

10. The net gain (loss) for the five-month period is?
a. (520,000) c. 680,000
b. 400,000 d. 880,000

Joint Arrangements:
On January 1, 2019, ABC Company, signed a joint venture agreement with another venturer for the
production of CD’s. DEF Corp. is established to carry on the business venture, with each venturer
contributing 1,000,000 for equal shares in the company’s 160,000, 12.50 par value shares. They will
share profits equally.

On December 31, 2019 the financials of DEF Corp. is as follows:

Combined Statement of Income and Retained Earnings
Revenues 400,000
Expenses 308,000
Net income 92,000
Retained Earnings, Jan. 1, 2019 -
Retained Earnings, Dec. 31, 2019 92,000

BALANCE SHEET
DECEMBER 31, 2019
Cash 72,000 Liabilities 580,000
Accounts Receivable 320,000Share Capital 2,000,000
Inventory 500,000Retained Earnings 92,000 Plant,
Property & Equipment 1,880,000
Accum. Depreciation (100,000)
TOTAL 2,672,000
2,672,000

The financial statements of ABC Company for the same period, before the adjustment for its share of
DEF’s net income, follow:
 Revenues 8,640,000
Expenses 7,424,000
Profit 1,216,000
Share Capital 2,400,000
Retained Earnings 736,000
Liabilities 672,000
Totals 5,024,000

Cash 408,000
Accounts Receivable 384,000
Inventory 672,000 Plant,
Property & Equipment 3,120,000

Accum. Depreciation (560,000)

Investment in Joint Venture 1,000,000
Totals 5,024,000

1. Determine the amount of retained earnings to be reported by ABC in its balance sheet at
December 31, 2019:
a. 736,000 c. 4,398,000
b. 782,000 d. 1,998,000
2. Determine the balance of the Investment in JV to be reported by ABC in its balance sheet at
December 31, 2019:
a. 0 c. 1,000,000
b. 1,046,000 d. 1,040,320

On January 1, 2019, SME A acquired a 35% equity of Y CORPORATION for 92,800. SME A shares in the
joint control of the relevant activities of Y CORPORATION in relation to its profitable operations.
Transaction costs of 5% of the purchase price of the shares were incurred by SME A.

On December 31, 2019, Y CORPORATION declared and paid dividends of 24,000 for the year ended
2019.

For the year ended December 31, 2019 Y CORPORATION recognized a loss of 67,200.

Published price quotations do not exist for the shares of Y CORPORATION. Using appropriate valuation
technique SME A determined the fair value of its investment in Y CORPORATION at December 31, 2019
as 104,000. Costs to sell are estimated at 9% of the fair value of the investment. SME A does not prepare
consolidated financial statements because it does not have any subsidiary.

3. What is the profit (loss) recognized by SME A in 2019 from entity Y CORPORATION under the fair
value method?
a. 13,200 c. 14,960
b. 9,600 d. 3,600
4. What is the profit (loss) to be recognized by SME A in 2019 from Y CORPORATION using the cost
model?
a. 5,600 c. (24,000)
b. (17,184) d. (1,184)
 5. What is the profit (loss) to be recognized by SME A in 2019 from Y CORPORATION using the
equity model?
a. (23,520) c. 4,144
b. 7,840 d. (1,856)
6. What is the amount of Investment in Y CORPORATION to be recognized by SME A in its 2019
balance sheet, using the cost model?
a. 94,640 c. 92,800
b. 97,440 d. 94,240
7. What is the amount of Investment in Y CORPORATION to be recognized by SME A in its 2019
balance sheet, using the fair value model?
a. 94,640 c. 65,520
b. 104,000 d. 92,800
8. What is the amount of Investment in Y CORPORATION to be recognized by SME A in its 2019
balance sheet, using the equity model?
a. 104,000 c. 65,520
b. 92,800 d. 94,640

MENCHU and OSANG in a joint venture, contributed 24,000 each in order to purchase canned goods
which were sold by lots at a closing-out sale. They agreed to divide their profits equally and each shall
record his purchases, sales and expenses in his own books. After selling almost all the canned goods,
they wind up their venture. The following are the venture transactions:

Joint Venture credit balances were OSANG, (19,200) and MENCHU, (16,800). Expenses paid from the
Joint Venture cash were 2,400 by OSANG and 3,120 by MENCHU. Cost of unsold canned goods which
OSANG and MENCHU agreed to assume were 720 and 1,120 respectively.

9. The total sales of the joint venture were:

a. 89,520 c. 85,840
b. 84,000 d. 95,280
10. In the final settlement, the amount due to OSANG including her investment was:
a. 42,200 c. 41,280
b. 41,040 d. 42,480

A, B and C are joint operators of JOINT OPERATION D (each having an equal share in interest). On
January 1, 2019, A sells equipment having a book value of 51,200 to the operation for 128,000. The
equipment had an estimated useful economic life of 5 years at that date.

11. At what amount will A show this equipment at its balance sheet at January 1, 2019?
a. 17,067 c. 21,333
b. 42,667 d. 0
12. At what amount will A show this equipment at its balance sheet at December 31, 2019?
a. 34,133 c. 42,667
b. 13,653 d. 17,067