ACC16 - HO 1 - Corporate Liquidation
ACC16 - HO 1 - Corporate Liquidation
ACC16 - HO 1 - Corporate Liquidation
CORPORATE LIQUIDATION
I. Introduction
When the financial position of the debtor is such that it cannot resolve its financial
difficulties it will have to resort to liquidation. This process may be started by the debtor
filing a voluntary petition or by creditors filing an involuntary petition which entails the
process of an orderly realization of the debtor’s assets and payment of the debtor’s
liabilities.
1. Assets Pledge to Fully Secured Creditors: These are the assets with realizable values
equal to, or in excess of the liabilities for which they have been pledge as collateral.
2. Assets Pledge to Partially Secured Creditors: These are assets with realizable values that
are less than the liabilities for which they have been pledged as security.
3. Free Assets: These are assets not pledge to specific liabilities or pledge assets with a
realizable value in excess of the amount needed to satisfy claims of secured creditors.
Unrecorded assets with market values are included in the statement of affairs under
free assets category and are called contingent assets.
4. Fully Secured Creditors: These are liabilities covered by a pledge of specific assets of
realizable value equal to or in excess of such liabilities.
5. Partially Secured Creditors: These are liabilities covered by a pledge of specific assets of
a realizable value that is less than such liabilities.
6. Unsecured Liabilities with Priority: These are specified items that must be paid in full
ahead of any other type of unsecured liabilities.
7. Unsecured Liabilities without Priority: These liabilities have neither legal priority nor
security interest in specific property. They are paid off (pro-rata when there is an asset
deficiency) after all priority and secured liabilities have been satisfied.
8. Stockholder’s Equity: The balances of the stockholder’s equity accounts depend on the
amount of free assets available. If there is a deficiency of assets to satisfy unsecured
creditors, all claims of equity holders are extinguished. Only if there are free assets in
excess of unsecured liabilities can stockholders share in any distribution.
EXERCISES:
PROBLEM 1
The unsecured creditors of ABC Corporation filed a petition on February 14, 2014 to force ABC
Corporation into bankruptcy. The court order for relief was granted on February 28, 2014 at which
time an interim trustee was appointed to supervise the liquidation. A listing of assets and liabilities
of ABC Corporation as of February 28, 2014, along with estimated realizable values, is as follows:
Additional information:
a. Patents completely written-off in the books in the past years but with a realizable value of
P10,000.
b. The books do not show the following accruals (unrecorded expenses/additional liabilities):
Taxes – P16,400; and
Interest on Mortgage – P10,000
c. The investments have been pledged as security for holder of the notes payable.
d. The trustee fees and other costs of liquidation are estimated to be P60,000.
Determine:
1. The total free assets should be:
a. 1,831,400 b. 1,821,400 c. 717,800 d. 638,000
2. The net free assets should be:
a. 717,800 b. 698,000 c. 638,000 d. 628,000
3. The estimated deficiency to unsecured creditors should be:
a. 87,000 b. 47,800 c. 27,000 d. 7,200
4. The expected recovery % of unsecured creditors should be:
a. 96% b. 95% c. 88% d. 86.62%
5. The estimated payment to creditors should be:
Unsecured Creditors
Fully Secured Partially Secured
With Priority Without Priority
a. 410,000.00 110,000.00 79,800.00 638,000.00
b. 500,000.00 158,400.00 60,000.00 589,600.00
c. 410,000.00 165,000.00 79,800.00 670,000.00
d. 410,000.00 158,400.00 79,800.00 589,600.00
PROBLEM 2: Alanis Dissolved Corporation filed a voluntary petition for bankruptcy in January 2014.
On 31 March 2014, the trustee provided the following information about the corporation’s financial
affairs:
Liabilities
Liabilities for priority claims 160,000.00
Accounts payable - unsecured 300,000.00
Notes payable, secured by
Accounts Receivable 200,000.00
Mortgage Payable, secured by
all plant assets 440,000.00
Total Liabilities 1,100,000.00
Determine:
1. The amount expected to be available for unsecured claims without priority (net free assets):
a. 300,000 b. 580,000 c. 140,000 d. 310,000
2. The expected recovery per peso of unsecured creditors:
a. .215 b. .223 c. .415 d. .400
3. The estimated payment to creditors:
a. 730,000 b. 45,000 c. 770,000 d. 890,000
PROBLEM 3: The following information is taken from the statement of affairs of the Kirsten
Corporation:
Asset pledge with fully secured creditors (current fair value, P166,000) 208,000.00
Asset pledge with partially secured creditors (current fair value, P112,000) 144,000.00
Free assets (current fair value, P104,000) 124,000.00
Liabilities with priority 26,000.00
Fully secured creditors 76,000.00
Partially secured creditors 136,000.00
Unsecured creditors 276,000.00
Determine:
PROBLEM 4: The following information was available on 31 March 2014 for Austin Corporation,
which they cannot pay their liabilities when they are due:
Carrying Amounts
Cash 16,000.00
Trade accounts receivable (net): Current fair 184,000.00
value equal to carrying amount
Determine: