BADVACC2X – 2TAY2021 – ACT188 – QUIZ2 – CORPORATE LIQUIDATION

1. It refers to the extinguishment of the juridical personality of a corporation for causes

expressly provided by law.
a. Corporate liquidation
b. Corporate dissolution
c. Corporate rehabilitation
d. Corporate termination

2. It refers to process of winding up the affairs of the corporation by settling its corporate
debts and distributing the remainder to the stockholders.
a. Corporate liquidation
b. Corporate dissolution
c. Corporate rehabilitation
d. Corporate termination

3. After the date of corporate dissolution, what is the maximum period allowed by law to a
dissolved corporation to complete its liquidation process?
a. 1 year
b. 2 years
c. 3 years
d. 4 years

4. What is the term used when the total stockholders’ equity has debit balance?
a. Deficit
b. Deficiency
c. Delinquency
d. Default

5. Which of the following unsecured debts with priority shall be paid first during corporate
liquidation?
a. Corporate liabilities to employees
b. Obligations arising from corporate crime
c. Corporate liabilities arising from taxes to government
d. Obligations arising from corporate tort or quasi-delict

6. Which of the following creditors can always fully recover its claim from a dissolved
corporation during corporate liquidation?
a. Fully secured creditors
b. Partially secured creditors
c. Unsecured creditors with priority
 d. Unsecured creditors without priority

7. Which of the following items is not being considered in the computation of recovery
percentage of unsecured creditors without priority?
a. Assets reserved for fully secured credits
b. Assets reserved for partially secured credits
c. Unsecured portion of partially secured liabilities
d. None of the above

8. Which among the following is a limitation of the Statement of Affairs?

a. It can only be used in a bankruptcy.
b. Amounts presented are mere estimations and eventually may turn inaccurate.
c. The amounts can vary depending on whether the bankruptcy is voluntary or
involuntary.
d. It only covers a short period of time.

9. Which of the following documents is used by a trustee to report periodically on the status
of fiduciary activities?
a. Statement of Affairs
b. Deficiency Statement
c. Statement of Realization and Liquidation
d. Statement of Estate Deficit

10. The ratio called the “Dividend to General Unsecured Creditors” is calculated through the
following formula:
a. Estimated amount available for unsecured creditors with/without priority divided by
Total claims of all unsecured creditors with/without priority
b. Estimated realizable value of all debtor assets divided by the book value of all
liabilities
c. Estimated gain/loss on liquidation divided by total estimated net realizable value of
the debtor’s assets
d. Net estimated amount available to unsecured creditors without priority divided
by total claims of all unsecured creditors.

11. The following statements are INCORRECT concerning the Statement of Affairs. Which
of the following is the exception?
a. Liabilities with priority are shown on the liability side of the statement and as
a deduction on the asset side of the statement
b. Assets pledged with fully secured creditors are shown on the liability side of the
statement and as a deduction on the asset side of the statement.
 c. Liabilities owed to partially secured creditors are shown on the asset side of the
statements and treated as a deduction on the liability side of the statement.
d. None of the above

12. When the dividend rate to unsecured creditors is computed, the resulting rate is 115%.
Which of the following is the implication for this?
a. Stockholders can expect a return on their interests.
b. Unsecured creditors will receive an amount in excess of the book value of their
claims.
c. Secured creditors will receive an amount in excess of the book value of their
claims.
d. A material error is made. Dividend rates shall only be less than 100%.

13. Which of among the following is most likely the objective of the bankruptcy laws in the
Philippines?
a. Ensure that all debtors are treated on equal footing.
b. Distribute assets fairly and discharge honest debtors from liabilities upon
settlement.
c. Protect the economy and stimulate growth.
d. Prevent insolvency and protect the shareholders.

14. What differentiates the Statement of Realization and Liquidation from the Statement of
Affairs?
a. The former reports estimated realizable values rather than actual results of
liquidation
b. The former provides summary of settlement of secured debts only
c. The former is only prepared upon the final completion date of the liquidation
process.
d. The former reports actual results periodically rather than estimated
realizable values.

15. You are provided with the below statements:

Statement 1: Anticipated administration expenses related to liquidation are reported as
unsecured liabilities with priority.
Statement 2: The use of estimated realizable values in preparing the Statement of Affairs
in corporate liquidations is based on the assumption of going concern, as required by the
Conceptual Framework.
a. Statement 1 is true; statement 2 is false.
b. Statement 1 is false; statement 2 is true.
c. Both statements are true.
d. Both statements are false.
Problem 1 (Items 16-18). WestLife Company is experiencing financial problems which resulted
to ultimate bankruptcy. The statement of financial position of the entity before liquidation is
presented below:

Cash 100,000 Income tax payable 200,000

Inventory 300,000 Salaries payable 300,000
Land 200,000 Note payable 800,000
Mortgage payable 100,000
Accounts payable 400,000
Contributed capital 500,000
Deficit (1,700,000)
 The note payable is secured by the inventory with net realizable value of
P250,000
 The mortgage payable is secured by the land with fair value of P120,000

16. What amount can the holder of the note payable expect from the liquidation?
a. 320,000
b. 250,000
c. 300,000
d. 260,000

17. What is the amount received by the holder of the mortgage payable at the end of
corporate liquidation?
a. 100,000
b. 150,000
c. 200,000
d. 120,000

18. What is the amount received by the employees at the end of corporate liquidation
concerning their salaries?
a. 100,000
b. 120,000
c. 72,000
d. 300,000

Problem 2 (Items 19-21). Sistar, Inc. has experienced financial difficulties and decided to
liquidate their affairs. On April 30, 2019, the trustee provided the following information about
the corporation’s financial affairs:
 Estimated
Assets Book Value Realizable Values
Cash P 40,000 P 40,000
Accounts receivable (net) 200,000 150,000
Inventories 300,000 140,000
Plant assets (net) 500,000 560,000
Total Assets P 1,040,000

Liabilities
Liabilities for priority claims P 160,000
Accounts payable 300,000
Notes payable, secured by 200,000
Accounts receivable
Mortgage payable, secured by
all plant assets 440,000
Total liabilities P 1,100,000

Determine:
19. The amount expected to be available for unsecured claims without priority (net free
assets):
A. P300,000
B. P580,000
C. P140,000
D. P310,000

20. The expected recovery per peso of unsecured creditors:

A. 40%
B. 41.5%
C. 80%
D. 22.3%

21. The estimated payment to creditors:

A. P45,000
B. P730,000
C. P770,000
D.P890,000

Problem 3 (Item 22). Eraserheads Corporation has been undergoing liquidation since February
14. Its condensed statement of realization and liquidation for the month of July is presented
below:
 Interest receive in cash on investment 10,500
Purchases on account 105,000
Liabilities liquidated 2,450,000
Assets realized 2,100,000
Payment of expenses of trustee 525,000
Liabilities to be liquidated, July 1 4,574,500
Sales on Account 50,000
Assets to be realized, August 1 2,940,000
Liabilities not liquidated, July 31 2,229,500
Sales for cash 1,750,000
Assets not realized, July 1 6,650,000

22. What is the net gain (loss) on realization and liquidation?

A. 1,225,000
B. (479,500)
C. (1,225,000)
D. 479,500

Problem 4 (Items 23-25). Boyz2Men & Co. liquidates its corporate affairs. All non-cash assets
have been converted to cash of 3,060,000. The following claims are approved by the trustee:
 Accounts payable – 765,000
 Trustee’s fees and other costs of liquidation – 408,000
 Mortgage payable (secured by property which realized 2,040,000) – 1,530,000
 Note payable (secured by accounts receivables of which 765,000 are collected and
255,000 were written off) – 1,020,000
 Prepaid revenue (25,500 each from two customers who ordered products not yet
delivered) – 51,000
 Property taxes payable – 102,000

Prepaid revenues are considered as unsecured liabilities WITH priority. Cash received from
realization of properties and receivables are included in the 3,060,000 available cash. Answer
the below items:
23. How much of the Accounts Payable and Notes payable (aggregated) will not be paid due
to cash deficiency?
a. 969,000
b. 1,007,862
c. 816,000
d. 777,138

24. How much Accounts payable and Notes payable (aggregated) will be paid?
a. 969,000
 b. 1,007,862
c. 816,000
d. 777,138

25. How much total amount will be paid to Trustee’s fees, Mortgage payable, Prepaid
Revenues, and Property Taxes Payable?
a. 2,052,413
b. 2,050,200
c. 2,091,000
d. 418,200

Problem 5 (Items 26-29). The unsecured creditors of Shinee Corporation filed a petition on August
1,2020 to involuntarily have the corporation liquidated. Order for relief was granted on August 15. An
interim trustee was appointed to manage the liquidation process of the estate. The Statement of Financial
Position of Shinee Corporation as of August 15, 2020, as well as their recoverable amounts, is as follows:

Assets Book Value Estimated Realizable Values

Cash P 61,400 P 61,400
Accounts receivable 250,000 15% of the accounts receivable
Allowance for D/A (20,000) is estimated to be uncollectible
Inventories 420,000 Estimated selling price,
P340,000 which will incur costs
to dispose of P50,000
Prepaid expenses 40,000 ?
Investments 180,000 P110,000
Land 210,000 An offer of P500,000 has been
Buildings (net) 260,000 received for land and buildings
Machinery & Equipment (net) 220,000 P53,900
Goodwill 200,000 ?
Total assets P 1,821,400
Liabilities & Equity
Accounts payable P 670,000
Wages payable 3,400
Notes payable 160,000
Accrued interest- Notes 5,000
Mortgage payable, secured by 400,000
land and buildings
Capital stock 800,000
Additional paid-in capital 80,000
Deficit (297,000)
Total Liabilities & Equity P1,821,400

Additional Information:
a. Patents completely written-off the books in 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
  Interest on mortgage …………………………………………………..10,000
c. The investments have been pledged as security for holder of the notes payable.
d. The trustee fees and other costs of liquidating the estate are estimated to be P60,000.

Prepaid expenses and goodwill are assumed with zero realizable value, if problem is silent. Compute
for the below items:

26. How much should the NET FREE ASSETS be?

a. 717,800
b. 698,000
c. 628,000
d. 638,000

27. What should be the estimated recovery percentage of unsecured creditors?

a. 96%
b. 88%
c. 86.62%
d. 95%

28. How much can each type of creditor claim from the liquidation?
a. Fully secured - 410,000 ; Partially Secured – 110,000 ; Unsecured with priority –
79,800 ; Unsecured without priority – 638,000
b. Fully secured - 500,000 ; Partially Secured – 158,400 ; Unsecured with priority –
60,000 ; Unsecured without priority – 589,600
c. Fully secured - 410,000 ; Partially Secured – 158,400 ; Unsecured with
priority – 79,800 ; Unsecured without priority – 589,600
d. Fully secured - 410,000 ; Partially Secured – 165,000 ; Unsecured with priority –
79,800 ; Unsecured without priority – 670,000

29. Compute for the estimated net loss.

a. 583,600
b. 593,600
c. 670,000
d. 680,000

30. As a CPA, you have been provided with the following information:
 Assets at book value 750,000
 Assets at net realizable value 525,000
 Liabilities at book value (Fully Secured Mortgage: 300,000 ; Unsecured accounts
and notes payable: 350,000)
 Unrecorded liabilities (Interest on notes: 2,500 ; Cost of estate administration:
30,000)
How much is the estimated deficiency to unsecured creditors?
a. 123,000
b. (123,000)
c. 125,500
d. (157,500)