Afar 02: Corporate Liquidation: I. True or False - Theory of Accounts

AFAR 02: CORPORATE LIQUIDATION
I. TRUE OR FALSE - THEORY OF ACCOUNTS
1. Income tax payable is not part of unsecured liabilities without priority.
2. If the corporation has an inability to pay debts because of lack of cash or other liquid assets, it
immediately means that it is insolvent.
3. A corporation undergoing liquidation needs to follow the measurement bases prescribed in the
Conceptual Framework and in the PFRSs.
4. Cash is reported in the Statement of Realization and Liquidation because it is part of assets.
5. Unsecured claims with priority would always be paid in full amount or the percentage of recovery is 100
percent.
6. Assets to be realized do not include cash.
7. Estimated estate deficit is computed by subtracting net free assets from total unsecured liabilities.
8. Corporate liquidation refers to the extinguishment of the juridical personality of a corporation for causes
expressly provided by law.
9. Corporate termination is the process of winding up the affairs of the corporation by settling its corporate
debts and distributing the remainder to the stockholders.
10. Deficiency refers to retained earnings with negative or debit balance. This will normally require a company
to undergo quasi-reorganization a.k.a. corporate rehabilitation.
11. Deficit refers to stockholders' equity with negative or debit balance and this will result to corporation
liquidation.
12. Fully Secured Claim - refers to secured claim with a collateral higher than the amount of the claim.
13. Partially Secured Claim - refers to secured claim with a collateral lower than the amount of the claim.
14. Liabilities not liquidated represents ending balance of liabilities.
15. Net free assets divided unsecured liabilities without liabilities equals percentage of recovery for secured
creditors.
Page 1 of 5
II. PROBLEM SOLVING
Use the following information for questions 1-6

A bankrupt entity has undergone corporate liquidation. Presented below is its statement of financial position
before the start of liquidation:
Cash P 300,000 Accounts Payable P 100,000
Machinery 500,000 Salaries Payable 200,000
Building 1,200,000 Income tax Payable 300,000
Loans Payable 400,000
Mortgage payable 500,000
Contributed capital 800,000
Deficit (300,000)
The following additional data are provided:
• Liquidation expenses amounting to P600,000 were paid.
• The loans payable is secured by the machinery which has fair value of P300,000.
• The mortgage payable is fully secured by the building.
• At the end of liquidation, the holder of loans payable received P340,000.
1. What is the recovery percentage of unsecured creditors without priority?

a. 15%
b. 85%
c. 60%
d. 40%
2. What is the amount received by the holder of accounts payable at the end of liquidation?
a. P85,000
b. P15,000
c. P40,000
d. P60,000
3. What is the amount of net free assets available at the end of liquidation?
a. P80,000
b. P40,000
c. P120,000
d. P200,000
4. What is the fair value or realizable value of building?

a. P880,000
b. P1,380,000
c. P1,300,000
d. P1,100,000
5. How much is the estimated payments to all liabilities?

a. P 1,900,000
b. P 1,380,000
c. P 1,940,000
d. P 1,980,000
6. How much is the estimated deficiency?

a. P 80,000
b. P 110,000
c. P 130,000
d. P 120,000
Page 2 of 5
Use the following information for questions 7-10
In 2030, Camel Corp. was forced into bankruptcy and begun to liquidate. The following selected account
balances were taken from its statement of affairs:
Estimated
Current
Book Value Value
Assets pledged with partially secured creditors

P 80,000 P 50,000
Total free assets 220,000 160,000
Book Value Amount
Unsecured
Preferred claims P 16,000 P 0

Partially secured liabilities 75,000 25,000
Unsecured liabilities 155,000 155,000
7. What is the total amount available for payment of claims of unsecured creditors?
a. 0
b. 144,000
c. 160,000
d. 210,000
8. What is the estimated amount of liquidating dividend per peso claim (rounded to the nearest
centavo)?
a. 0.80
b. 0.88
c. 1.03
d. 1.17
9. What is the amount of deficiency to creditors?

a. 180,000
b. 160,000
c. 144,000
d. 36,000
10. How much is the estimated payments to all liabilities?
a. P 240,000
b. P 230,000
c. P 220,000
d. P 210,000
Page 3 of 5
Use the following information for question 11
The accountant of Drifting Corp. prepared a statement of affairs. Total Free Assets is amounting to
P700,000. Unsecured claims of all classes totaled to P1,050,000 including the excess of partially secured
claims over the related asset. The following data are claims deemed outstanding:
1. Accrued salaries, P15,000.

2. Unrecorded note for P10,000, on which P600 of interest has accrued held by Normandy Co.
3. A note for P30,000 secured by P40,000 receivable, estimated to be 60% collectible held by Jones Co.
4. A P15,000 note, on which P300 interest has accrued held by James Pty. Property with a book value of
P10,000 and a market value of P18,000 is pledged to guarantee payment of principal and interest.
5. Unpaid income taxes of P35,000.
11. What is the amount realized by partially secured creditors?

a. 10,600
b. 19,500
c. 24,900
d. 27,900

Nanay Corp. has been undergoing liquidation since January 1. As of March 31, its condensed statement of
liquidation and realization is presented below:
Assets to be realized 1,375,000
Assets acquired 750,000

Assets
Assets realized 1,200,000
Assets not realized 1,375,000
Liabilities liquidated 1,875,000

Liabilities
Liabilities not liquidated 1,700,000
Liabilities to be liquidated 2,250,000
Liabilities assumed 1,625,000
Revenues and Supplementary charges 3,125,000

Expenses Supplementary credits 2,800,000
12. How much is the net gain (loss) for the three-month period ending March 31?
a. 425,000
b. 360,000
c. (425,000)
d. (360,000)
Page 4 of 5
The following information was taken from the statement of realization and liquidation of Chow Chow Co. in the
currency of Petron:
Assets to be realized 2,000,000

Assets not realized 220,000
Assets realized 1,180,000
Liabilities not liquidated 1,290,000
Liabilities to be liquidated 1,900,000
Supplementary expenses 40,000
Supplementary income 50,000
Estate Deficit 970,000
13. How much is the ending balance of cash?

a. 100,000
b. 200,000
c. 300,000
d. 400,000
-END-
Page 5 of 5

Afar 02: Corporate Liquidation: I. True or False - Theory of Accounts

Uploaded by

Copyright:

Available Formats

Afar 02: Corporate Liquidation: I. True or False - Theory of Accounts

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Afar 02: Corporate Liquidation: I. True or False - Theory of Accounts

Uploaded by

Copyright:

Available Formats

AFAR 02: CORPORATE LIQUIDATION

I. TRUE OR FALSE - THEORY OF ACCOUNTS

1. Income tax payable is not part of unsecured liabilities without priority.

6. Assets to be realized do not include cash.

14. Liabilities not liquidated represents ending balance of liabilities.

Use the following information for questions 1-6

1. What is the recovery percentage of unsecured creditors without priority?

4. What is the fair value or realizable value of building?

5. How much is the estimated payments to all liabilities?

6. How much is the estimated deficiency?

Assets pledged with partially secured creditors

Preferred claims P 16,000 P 0

9. What is the amount of deficiency to creditors?

1. Accrued salaries, P15,000.

11. What is the amount realized by partially secured creditors?

Use the following information for question 12

Assets to be realized 1,375,000

Assets acquired 750,000

Assets not realized 1,375,000

Liabilities liquidated 1,875,000

Liabilities to be liquidated 2,250,000

Liabilities assumed 1,625,000

Revenues and Supplementary charges 3,125,000

Assets to be realized 2,000,000

13. How much is the ending balance of cash?

You might also like