BCSVillaluz

ADVANCED FINANCIAL ACCOUNTING AND REPORTING

HAND-OUT NO. 2: Corporate Liquidation

NATURE OF CORPORATE LIQUIDATION

Corporate liquidation refers to the process of converting non-cash assets of a liquidating corporation into cash and
distributing the net proceeds to its creditors first and then the remainder to stockholders. This shall be completed
within three (3) years from the dissolution of a corporation.

FINANCIAL REPORTS
Liquidating entities usually prepare the following financial reports:
1. Statement of affairs
2. Statement of deficiency
3. Statement of realization and liquidation

Statement of Affairs
• The initial report prepared at the start of the liquidation process.
• This contains an inventory of assets and liabilities of the liquidating corporation at the beginning of the liquidation
process.
• It is used to approximate the estimated amounts available to each class of claims.
► Assets are reported at their estimated realizable values while liabilities are reported at their settlement
values.

Assets are classified as follows:

1. Assets pledged with fully secured creditors. These are assets whose estimated realizable value is equal or
greater than the liabilities secured by them. The excess of the realizable value over the amount of liability
secured becomes part of the free assets available to unsecured creditors.
2. Assets pledged with partially secured creditors. These are assets whose estimated realizable value is less
than the liabilities secured by them. The unsecured portion of the liability will become part of the unsecured
liabilities without priority and the claimants will participate in the proceedings.
3. Free assets. These are the assets not held as collateral or security to liabilities and are available for unsecured
creditors

The liabilities or claims are to be classified as:

1. Unsecured liabilities with priority. Although not secured, these liabilities are preferred before any payment
to the general unsecured creditors is made. The following are liabilities with priority (in the proper order):
✓ Unpaid salaries and wages of employees
✓ Estate administrative expenses of the trustee
✓ Unpaid taxes
2. Fully secured liabilities. These are creditors’ claims whose amount is less than or equal to the realizable value
of assets that secure them.
3. Partially secured liabilities. These are creditors’ claims whose amount is greater than the realizable value of
assets that secure them. In other words, these are the liabilities secured by assets with realizable value
insufficient to cover the claims. The unsecured portion of the liability will become part of the unsecured liabilities
without priority and the claimants will participate in the proceedings.
4. Unsecured liabilities without priority. These are creditors’ claims that are not secured by any asset nor with
priority.

Estimated deficiency to unsecured non-priority creditors. This is computed as net free assets less total unsecured
liabilities without priority.
➢ Alternatively, it can be computed as total estimated realizable value of assets less total claims.

Statement of Deficiency
• This is prepared to accompany the statement of affairs.
• This summarizes the sources of deficiency such as:
✓ Net loss on realization (or asset disposition) [this should already be net of gains on realization]
✓ Additional liabilities and liquidation expenses
✓ Losses to be borne by owners (this is equivalent to the total shareholders’ equity)

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 1 of 4
 BCSVillaluz
Problem 1:
LET GO Corp. has filed for voluntary insolvency and is about to liquidate its business. LET GO Corp.’s statement of
financial position immediately prior to the liquidation process is shown below:

LET GO Corp.
Statement of Financial Position
As of December 31, 2021

ASSETS
Current assets:
Cash P40,000
Accounts receivable 220,000
Note receivable 100,000
Inventory 530,000
Prepaid assets 5,000
895,000

Noncurrent assets:
Land 500,000
Building, net 2,000,000
Equipment, net 300,000
Goodwill 5,000
2,805,000
TOTAL ASSETS 3,700,000

LIABILITIES AND EQUITY

Current liabilities:
Accrued expenses 221,000
Income tax payable 350,000
Accounts payable 1,000,000
1,571,000

Noncurrent liabilities
Note payable (secured by equipment) 300,000
Loan payable (secured by land and building) 2,000,000
2,300,000

Capital deficiency:
Share capital 500,000
Retained earnings (deficit) (671,000)
(171,000)
TOTAL LIABILITIES AND EQUITY 3,700,000

Additional information:
The following information was determined before the commencement of the liquidation process:
a. Only 76% of the accounts receivable is collectible.
b. The note receivable is fully collectible. An accrued interest receivable of P10,000 was not yet recorded.
c. The inventory has an estimated net selling price of P410,000.
d. The prepaid assets are nonrefundable.
e. The land and building are expected to be sold at a total amount of P2,600,000.
f. The equipment is expected to be sold at a net selling price of P200,000.
g. Administrative expenses expected to be incurred during the liquidation process is P30,000. This amount is not yet
reflected on the statement of financial position.
h. Accrued expenses include accrued salaries of P25,000.
i. Accrued interest on the loan payable amounting to P15,000 was not reflected in the statement of financial position.
j. All of the other liabilities are stated at their expected settlement amounts.

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 2 of 4
 BCSVillaluz
REQUIRED:
1. How much is the total free assets?
2. How much is the net free assets?
3. How much is the estimated deficiency to unsecured creditors without priority?
4. What is the estimated recovery percentage of unsecured creditors without priority?
5. How much is the estimated amount to be received by fully secured creditors?
6. What is the estimated recovery percentage of fully secured creditors?
7. How much is the estimated amount to be received by unsecured creditors with priority?
8. What is the estimated recovery percentage of unsecured creditors with priority?
9. How much is the estimated amount to be received by partially secured creditors?
10. What is the estimated recovery percentage of partially secured creditors?
11. How much is the estimated amount to be received by unsecured creditors without priority?
12. How much is the estimated amount of cash to be paid to all the creditors of LET GO Corp.?
13. How much is the estimated amount of cash to be received by the corporate owners of LET GO Corp.?
14. How much is the estimated gross gain on asset disposition?
15. How much is the estimated gross loss on asset disposition?
16. How much is the estimated net gain (loss) on asset disposition?
17. How much is the estimated gain (loss) on liquidation?
18. How much is the estimated amount of loss to be absorbed by unsecured creditors?

Statement of Realization and Liquidation

• A financial report that reports the progress of the actual liquidation process.
• It also contains information on the accomplishments of the trustee.

Statement of Realization and Liquidation

Assets to be realized XX XX Assets realized
Assets acquired XX XX Assets not realized
Liabilities liquidated XX XX Liabilities to be liquidated
Liabilities not liquidated XX XX Liabilities assumed/incurred
Supplementary debits XX XX Supplementary credits
TOTAL XX XX

Components:
1. Assets to be realized – Represents the total book value of all non-cash assets available for disposal as of the
beginning of the period.
2. Assets acquired – Represents previously unrecorded assets that were recognized during the period. Also
known as additional assets or new assets.
3. Assets realized – Represents the total book value or net proceeds received from the sale or disposal of non-
cash assets during the period.
4. Assets not realized – Represents the total book value of all non-cash assets at the end of the period.
5. Liabilities to be liquidated – Represents the total book value of all liabilities to be settled as of the beginning
of the period.
6. Liabilities incurred/assumed – Represents previously unrecorded liabilities that were recognized during the
period. Also known as additional liabilities or new liabilities.
7. Liabilities liquidated – Represents the total amount paid on all liabilities settled during the period.
8. Liabilities not liquidated – Represents the total book value of all liabilities at the end of the period.
9. Supplementary charges or debits – Represents items of expenses incurred during the period.
10. Supplementary credits – Represents items of income realized during the period.

To determine the net gain or loss on realization and liquidation, compare the sum of the two sides of the T-account:
➢ If total debits exceed the total credits, there is net loss on realization and liquidation.
➢ If total credits exceed the total debits, there is net gain on realization and liquidation.

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 3 of 4
 BCSVillaluz
Problem 2:
The FAREWELL Company had a bad financial condition caused by heavy debts and insufficiency of liquid assets. On June
30, 2020, the following information was available:

Cash P84,000
Assets not yet realized:
Accounts receivable P60,000
Inventory 120,000
Trading securities 19,800
Land 73,500
Building 45,000
Equipment 36,000
Liabilities not yet settled:
Accounts payable P208,500
Notes payable 175,500
Salaries payable 30,000
Taxes payable 13,500
Bank loan 141,000
Estate deficit (P130,200)

During the six-month period ending December 31, 2020, the following transactions occurred:
(a) The trustee sold the trading securities for P18,000.
(b) Half of the inventories were sold for P48,000 while the other half were sold on account for P63,000.
(c) 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, 2021, the following transactions occurred:
(a) The trustee collected P70,000 of the accounts receivable.
(b) Sold land for P88,000.
(c) Sold equipment for P30,000.
(d) Paid the balance of bank loan and half of the notes payable.
(e) Administrative fee of P7,000 was paid.

1. How much is the net gain (loss) on realization and liquidation as of December 31, 2020?
2. How much is the estate deficit as of December 31, 2020?
3. How much is the ending balance of cash on December 31, 2020?
4. How much is the net gain (loss) on realization and liquidation as of June 30, 2021?
5. How much is the estate deficit as of June 30, 2021?
6. How much is the ending balance of cash on June 30, 2021?

Problem 3:
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 146,250
Supplementary credits 159,375

1. How much is the gain (loss) on realization and liquidation for the period?
2. If the ending balances of capital stock and retained earnings are P93,750 and P37,500, respectively, how much is
the ending balance of cash?
3. If the beginning balances of capital stock and retained earnings are P93,750 and P37,500, respectively, How much
is the ending balance of cash?
-END OF HANDOUT-
____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 4 of 4