BCSVillaluz

ADVANCED FINANCIAL ACCOUNTING AND REPORTING

HAND-OUT NO. 2: CORPORATE LIQUIDATION

CORPORATE LIQUIDATION PROCESS

Liquidation is the termination of business operations or the winding up of affairs. It is a process by which:
1. The assets of the business are converted into cash
2. The liabilities of the business are settled
3. Any remaining amount is distributed to the owners

FINANCIAL REPORTS PREPARED BY COMPANIES UNDERGOING LIQUIDATION

Liquidating entities usually prepare the following classes of financial reports:
1. Statement of affairs
2. Statement of realization and liquidation

STATEMENT OF AFFAIRS
This is the initial report prepared at the start of liquidation.

Problem 1:
Because of the inability to pay its debts, the Downfall Company has been forced into bankruptcy on March 31, 2020. The
statement of financial position as of that date is as follows:

Downfall Company
Statement of Financial Position
March 31, 2020

ASSETS
Current assets
Cash ₽2,000
Investment in ordinary shares 15,000
Accounts receivable 23,000
Inventory 41,000
Prepaid expenses 3,000 84,000

Property and equipment (net)

Land 100,000
Building 110,000
Equipment 80,000 290,000

Goodwill 15,000
TOTAL ASSETS 389,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Notes payable (secured by inventory) ₽75,000
Accounts payable 60,000
Accrued expense 18,000 153,000

Long-term liabilities
Notes payable (secured by lien on land and building) 200,000

Stockholders’ equity
Capital stock 100,000
Deficit (64,000) 36,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY 389,000

The following information has been accumulated:

 The investment in ordinary shares has appreciated in value since being acquired and is now worth ₽20,000.
Dividends of ₽500 are currently due from this investment.
 Only ₽12,000 of the company’s accounts receivable is estimated to be recoverable.
 The inventory held by the company can be sold for ₽43,000.
 A refund of ₽1,000 will be received from the various prepaid expenses.
 The land and building can still be sold for ₽231,000 while the equipment can only be sold for ₽32,000.
 Estimated administrative expenses for the liquidation is ₽21,500.
 Accrued expenses include salaries of ₽12,000 and payroll taxes from wages but not yet paid to the government
total ₽3,000.
BRIAN CHRISTIAN S. VILLALUZ, CPA
LEarning ADvancement Review Center (LEAD)
CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)
CPA Reviewer in Financial Accounting & Reporting (FAR)
CPA Reviewer in Auditing (Theory and Problems) Page 1 of 5
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 Interest of ₽5,000 on the company’s long-term liabilities has not been accrued for the first quarter of 2020.

Based on the above, determine the following:

1. Total free assets.
A. 31,000 C. 67,500
B. 57,000 D. 93,500

2. Net free assets.

A. 31,000 C. 67,500
B. 57,000 D. 93,500

3. Estimated deficiency to unsecured creditors.

A. 0 C. 38,000
B. 6,000 D. 64,000

4. Expected recovery percentage of unsecured creditors without priority.

A. 33% C. 90%
B. 60% D. 100%

5. Estimated payment to fully secured creditors.

A. 200,000 C. 226,000
B. 205,000 D. 231,000

6. Estimated recovery percentage of fully secured creditors.

A. 33% C. 100%
B. 60% D. 113%

7. Estimated payment to creditors with priority.

A. 0 C. 21,500
B. 15,000 D. 36,500

8. Estimated payment to partially secured creditors.

A. 43,000 C. 62,200
B. 45,000 D. 75,000

9. Estimated recovery percentage of partially secured creditors.

A. 33.33% C. 57.33%
B. 60.00% D. 82.93%

10. Estimated payment to unsecured creditors without priority.

A. 37,800 C. 63,000
B. 57,000 D. 95,000

11. Estimated payment to all creditors.

A. 341,500 C. 367,500
B. 354,300 D. 380,300

12. Estimated gross gain on asset disposition.

A. 13,500 C. 47,500
B. 28,500 D. 76,000

13. Estimated gross loss on asset disposition.

A. 13,500 C. 47,500
B. 28,500 D. 76,000

14. Estimated net gain (loss) on asset disposition.

A. 47,500 C. 76,000
B. (47,500) D. (76,000)

Problem 2:
The following information is made available to you:

Assets pledged for fully secured liabilities

(realizable value, ₽120,000 ) ₽150,000
Assets pledged for partially secured liabilities
(realizable value, ₽85,000 ) 120,000

BRIAN CHRISTIAN S. VILLALUZ, CPA

LEarning ADvancement Review Center (LEAD)
CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)
CPA Reviewer in Financial Accounting & Reporting (FAR)
CPA Reviewer in Auditing (Theory and Problems) Page 2 of 5
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Free assets (realizable value, ₽50,000 ) 70,000
Unsecured liabilities with priority 10,000
Fully secured liabilities 100,000
Partially secured liabilities 105,000
Unsecured liabilities without priority 60,000

Based on the above, determine the following:

1. Estimated recovery percentage of unsecured creditors.
A. 0 C. 90%
B. 75% D. 100%

2. Amount that would be paid to creditors with priority.

A. 0 C. 60,000
B. 10,000 D. 70,000

3. Amount that would be paid to fully secured creditors.

A. 100,000 C. 130,000
B. 120,000 D. 150,000

4. Amount that would be paid to partially secured creditors.

A. 85,000 C. 102,500
B. 100,000 D. 105,000

5. Amount that would be paid to unsecured creditors.

A. 0 C. 60,000
B. 45,000 D. 80,000

SUGGESTED ANSWERS: B, B, A, B, B

STATEMENT OF REALIZATION AND LIQUIDATION

 This is a financial report that reports the progress of the actual liquidation process.
 Depicted like a T-account.

Problem 3:
The FAREWELL Company had a bad financial condition caused by heavy debts and insufficiency of liquid assets. On June
30, 2019, the following information was available:

Cash 84,000
Assets not yet realized:
Accounts receivable 60,000
Inventory 120,000
Trading securities 19,800
Land 73,500
Building 45,000
Equipment 36,000
Liabilities not yet settled:
Accounts payable 208,500
Notes payable 175,500
Salaries payable 30,000
Taxes payable 13,500
Bank loan 141,000
Estate deficit (130,200)

During the six-month period ending December 31, 2019, the trustee sold the trading securities for P18,000; half of the
inventories were sold for P48,000 while the other half were sold on account for P63,000; and paid off P41,000 of the
bank loan and all liabilities with priorities as well as P8,000 for estate administrative expenses.

During the six-month period ending June 30, 2020, the trustee realized P70,000 for accounts receivable; sold land for
P88,000; sold equipment for P30,000; paid the balance of bank loan and half of the notes payable; administrative fee of
P7,000 was paid.

1. How much is the net gain (loss) on realization and liquidation as of December 31, 2019?
A. 0 C. (18,800)
B. 18,800 D. (21,000)

BRIAN CHRISTIAN S. VILLALUZ, CPA

LEarning ADvancement Review Center (LEAD)
CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)
CPA Reviewer in Financial Accounting & Reporting (FAR)
CPA Reviewer in Auditing (Theory and Problems) Page 3 of 5
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2. How much is the estate deficit as of December 31, 2019?
A. 111,400 C. 149,000
B. 130,200 D. Cannot be determined

3. How much is the ending balance of cash on December 31, 2019?

A. 57,500 C. 335,000
B. 317,900 D. 355,500

4. How much is the net gain (loss) on realization and liquidation as of June 30, 2020?
A. 0 C. (1,500)
B. 1,500 D. 2,000

5. How much is the estate deficit as of June 30, 2020?

A. 147,500 C. 150,500
B. 149,000 D. 152,000

6. How much is the ending balance of cash on June 30, 2020?

A. 50,750 C. 57,500
B. 55,700 D. 75,500

Problem 4:
The following data were taken from the statement of realization and liquidation of TIMES UP Corp. for the quarter
ended February 28, 2020:

Assets to be realized P103,125

Assets acquired 112,500
Assets realized 131,250
Assets not realized 46,875
Liabilities to be liquidated 168,750
Liabilities assumed 56,250
Liabilities liquidated 112,500
Liabilities not liquidated 140,625
Supplementary charges (debits) 146,250
Supplementary credits 159,375

1. The ending balances of capital stock and retained earnings are P93,750 and P37,500, respectively. What is the
gain (loss) on realization and liquidation for the period? How much is the ending balance of cash?
A. 52,500; 225,000 C. 65,000; 172,500
B. (52,500); 225,000 D. (65,000); 172,500

2. The beginning balances of capital stock and retained earnings are P93,750 and P37,500, respectively. What is
the gain (loss) on realization and liquidation for the period? How much is the ending balance of cash?
A. (52,500); 172,500 C. 52,500; 225,000
B. 52,500; 172,500 D. (52,500); 225,000

SUGGESTED ANSWERS: B, A
FINANCIAL ACCOUNTING THEORIES:
1. Which of the following are the financial reports for a corporate bankruptcy liquidation?
I. Balance sheet
II. Income statement
III. Statement of cash flows
IV. Statement of changes in equity
V. Statement of affairs
VI. Statement of realization and liquidation

A. I and II only
B. V and VI only
C. I, II, III and IV only
D. III, IV, V and VI only

2. The document used to estimate amounts available to each class of claims is called a(n)
A. Statement of assets, liabilities, and net worth
B. Statement of financial position
C. Statement of affairs
D. Statement of realization and liquidation

BRIAN CHRISTIAN S. VILLALUZ, CPA

LEarning ADvancement Review Center (LEAD)
CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)
CPA Reviewer in Financial Accounting & Reporting (FAR)
CPA Reviewer in Auditing (Theory and Problems) Page 4 of 5
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3. Which of the following is not included in the category of unsecured liabilities with priority in a liquidation case?
A. Unpaid wages
B. Amounts due to BIR
C. Amounts due to suppliers
D. Administrative expenses of the trustee

4. In the statement of affairs, the expected recovery percentage for a company’s unsecured creditors is calculated
as
A. Net free assets divided by unsecured liabilities
B. Net free assets divided by unsecured liabilities plus liabilities with priority
C. Total free assets divided by unsecured liabilities other than unsecured liabilities with priority
D. Total free assets divided by unsecured liabilities plus liabilities with priority

5. The document used by a trustee to report periodically on the status of fiduciary activities is called a(n)
A. Statement of assets, liabilities, and net worth
B. Statement of financial position
C. Statement of affairs
D. Statement of realization and liquidation

6. Which of the following would appear on a statement of realization and liquidation?

A. Net realizable value of assets pledged to partially secured creditors
B. Estimated deficiency to unsecured creditors
C. Net realizable value of assets to be realized
D. Gain or loss on realization

-END OF HANDOUT-

BRIAN CHRISTIAN S. VILLALUZ, CPA

LEarning ADvancement Review Center (LEAD)
CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)
CPA Reviewer in Financial Accounting & Reporting (FAR)
CPA Reviewer in Auditing (Theory and Problems) Page 5 of 5