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Oct 4 - Lecture

AAA Corp is experiencing financial difficulties and considering bankruptcy. It has more liabilities ($355,000) than assets at estimated realizable value ($269,000), resulting in an estimated deficiency of $86,000. Upon liquidation, secured creditors would be paid in full, while partially secured and unsecured creditors without priority could expect a minimum recovery percentage of around 54.62% based on available free assets of $103,500. Selling assets at realizable value rather than book value would result in an estimated net loss of $43,000.

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Carl Dhaniel Garcia Salen
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1K views4 pages

Oct 4 - Lecture

AAA Corp is experiencing financial difficulties and considering bankruptcy. It has more liabilities ($355,000) than assets at estimated realizable value ($269,000), resulting in an estimated deficiency of $86,000. Upon liquidation, secured creditors would be paid in full, while partially secured and unsecured creditors without priority could expect a minimum recovery percentage of around 54.62% based on available free assets of $103,500. Selling assets at realizable value rather than book value would result in an estimated net loss of $43,000.

Uploaded by

Carl Dhaniel Garcia Salen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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AAA Corp. is experiencing financial difficulty and considering filing for bankruptcy.

The data
below are its Statement of Financial Position:

Cash 4,000 Accounts payable 82,000


Accounts receivable 40,000 Bank loan 25,000
Note receivable - short term 36,000 Loan payable 160,000
Prepaid Expenses 1,000 Wages payable 12,000
Note receivable - long term 50,000 Tax payable 8,000
Land 10,000 Mortgage payable 43,000
Building 70,000 Stockholders' equity (38,000)
Machine 20,000
Equipment 45,000
Goodwill 16,000
Total Liabilities &
Total Assets 292,000 292,000
Stockholders' Equity

The following information are ascertained:


Estimated realizable values of the Assets:
Accounts receivable. 30,000
Note receivable - short term. 27,000
Note receivable - long term 55,000
Land 42,000
Building 60,000
Machine 6,000
Equipment. 25,000

Secured liabilities:
● P5,000 of the total accounts payable was secured by P3,500 of the total estimated realizable
value of the machine
● Bank loan was secured by 80% of the estimated realizable value of the accounts receivable
● Mortgage payable was secured by the land and building
● P50,000 of the total loan payable was secured by the note receivable - long term

Additional information:
● Accrued interest of the mortgage payable and long term note receivable were P10,000 and
P20,000 respectively
● Estimated liquidation expenses were P15,000
1. What is the estimated deficiency?
a. (71,000)
b. (96,000)
c. (86,000)
d. (92,000)

Statement of Financial Affairs (not the report form)

Free Assets (Not Pledged & Free Portion)


Cash. P 4,000 not pledged
AR. 6,000 not pledged
NR – ST. 27,000 not pledged
NR – LT (Including Interest). 25,000 free portion
Land and Bldg. 49,000 free portion
Machinery. 2,500 not pledged
Equipment 25,000 not pledged

TOTAL FREE ASSETS. P138,500. (available to all unsecured creditors with


and without priority)

Less: Unsecured with Priority (35,000) (1.liquidation /2. wages /3. taxes)

NET FREE ASSETS. P103,500. (available to all unsecured creditors without


priority)

vs.

Unsecured Without Priority (Nothing was Pledged & Unsecured Portion


of the Partially Secured)
Accounts Payable P77,000. (unsecured as in nothing was pledged)
1,500. (unsecured portion of the partially secured)
Bank loan. 1,000. (unsecured portion of the partially secured).
Loans Payable. 110,000 (unsecured as in nothing was pledged)
TOTAL UNSECURED LIAB. 189,500.

Estimated Deficiency = Net Free Assets <Total Unsecured Liabilities


P(86,000) P103,500 <189,500

Expected Recovery Percentage “minimum” = Net Free Assets/Total


Unsecured Liabilities
103,500/189,500 = 54.62%
SHORT CUT:

TOTAL LIABILITIES > TOTAL ASSETS at realizable value


P355,000 > 269,000 = (86,000)

Including the unrecorded amounts of assets and liabilities

----------------------------------------------------------------------------------------------------------

2. What is the estimated payment to the bank loan?


a. 24,546
b. 24,000
c. 25,000
d. 24,625

Estimated payment to fully secured creditors: (Always 100%)


Amount Paid Percentage Settlement
Loans Payable P50,000. P50,000. 100%
Mortgage Payable P53,000. P53,000. 100%
(Including Related Interest)

Estimated payment to unsecured creditors with priority:(Usually 100%)


Amount Paid Percentage Settlement
1. Administrative Expenses P15,000
2. Salary/Wages Payable 12,000
3. Taxes Payable 8,000
35,000 P35,000. 100%

Estimated payment to partially secured creditors:(Less than 100% but more than
the “minimum” expected recovery %)
Amount Paid Percentage Settlement
Accounts Payable P5,000. P4,319.30 86.39%
Bank Loan P25,000. P24,546.20. 98.18%
P28,865.50

Accounts Payable P5,000 – 3,500 = 1,500 x 54.62% = 819 + 3,500 = 4,319.30/5,000 = 86.39%
Bank Loan. P25,000 – 24,000 = 1,000 x 54.62%. = 546.20 + 24,000 = 24,546.20/25,000 = 98.18%
Estimated payment to non-priority unsecured creditors:(at the “minimum”
expected recovery %)
Amount Paid Percentage Settlement
Accounts Payable P77,000. P42,057.40 54.62%
Loan Payable P110,000. P60,082. 54.62%
P102,139.40

----------------------------------------------------------------------------------------------------------

3. What is the estimated loss?


a. (43,000)
b. (80,000)
c. (63,000)
d. (26,000)

Estimated Gain or Loss on Asset Realization (Compare the book value and the
realizable value of the RECORDED ASSETS)

AR (10,000)
NR-ST (9,000)
Prepaid Expense (1,000)
NR-LT 5,000
Land 32,000
Building (10,000)
Machine (14,000)
Equipment (20,000)
GW (16,000)

Estimated Loss on Realization P80,000


Estimated Gain on Realization P(37,000)

Estimated Net Gain/(Loss) on Realization P(43,000)


Add: Unrecorded Liability (as if loss) (10,000) Interest Payable
(15,000) Liquidation Expense
Less: Unrecorded Asset (as if gain) 20,000 Interest Receivable
Add: SHE (debit balance) (38,000)
Estimated Deficiency P(86,000)

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