CHAPTER 3:

CORPORATE LIQUIDATION

Corporation in liquidation usually prepares two classes of financial reports

namely the Statement of Affairs and the Statement of Realization and
Liquidation.

Statement of Affairs – not a going-concern report; thus, historical cost figures

are not relevant. The various parties concerned desire information that reflects:

1. The net realizable value of the debtor’s assets

2. The ultimate application of these proceeds to specific liabilities

Assets Classification:

1. Assets pledged to fully secured creditors

Estimated Realizable Value (ERV) of asset ≥ Liability
ERV of asset – Liability = Free Asset
2. Assets pledged to partially secured creditors
ERV of asset ≤ Liability
3. Free assets- available to meet the claims of priority liabilities and
unsecured creditors including assets pledged to fully secured creditors in
excess of the related liability

Liabilities Classification:

1. Unsecured liabilities with priority- include administrative expenses,

unpaid salaries and wages, taxes.
2. Fully secured creditors
3. Partially secured creditors
Liability > ERV of asset pledged
Liability – ERV of asset pledged = unsecured liability
4. Unsecured Creditors- all other liabilities for which the creditor has no
lien on any specific assets of the debtor corporation including unsecured
portion of the liability to partially secured creditors.

 Expected recovery percentage = Net Free Assets / Unsecured

Claims
Format of the Statement of Affairs

Book Values Assets ERV Available for unsecured creditors

XX Pledged to fully secured creditors XX

Less: Liab. to fully secured creditors XX XX

XX Pledged to partially secured creditors XX -

XX Free Assets( list) XX XX

Total Free Assets XX

Less: Creditors with priority XX

Net Free Assets XX

___ Estimated Deficiency(to balance) XX

XX XX

Book Values Liabilities and Stockholders’ Equity Secured and Unsecured nonpriority

priority claims liabilities

XX Liabilities with priority XX

XX Fully secured creditors XX

XX Partially secured creditors XX

Less: value of pledged assets XX XX

XX Unsecured creditors XX

XX Stockholders’ Equity ---

XX XX
Accounting and Reporting for Trustee/ Receiver

Assets and liabilities of the debtor corporation are recorded in the trustee’s
book values. On the other hand, contra assets are omitted. The following entry
should be prepared to open trustee’s books:

All assets XX

All liabilities XX

Estate equity XX

After the assumption of the estate, the trustee records gains, losses, and
liquidation expenses directly to the estate equity account. Any unrecorded
assets or liabilities the trustee discovers are likewise recorded in the estate
equity account. All assets acquired and liabilities incurred after the trustee
takes charge of the estate are identified as “new”.

Statement of Realization and Liquidation – shows a complete record of the

transactions of the receiver for a period of time

Assets

Assets to be realized (list) XX Assets realized- decreases XX

Assets acquired- increases XX Assets not realized XX

Liabilities

Liabilities liquidated XX Liabilities to be liquidated XX

Liabilities not liquidated XX Liabilities Incurred XX

Income or Loss and Supplementary Items

Sipplementary expenses XX Supplementary revenues XX

XX XX
CORPORATE LIQUIDATION PROBLEM
Problem I
I
The D Corporation, which is undergoing liquidation, has the following condensed balance
sheet as of July 1, 2008:

Assets Liabilities and Shareholders’ Equity

Cash P 396,000 Salaries Payable P120, 000

Receivables (net) 924,000 Accounts Payable 300,000
Inventory 231,000 Bonds Payable 270,000
Prepaid Expenses 3,000 Bank Loan Payable 1,200,000
Equipment (net) 900,000 Note Payable 594,000
Goodwill 120,000 Ordinary shares 240,000
Deficit (150,000)

Total P2,574,000 Total P2,574,000

 The bank loan payable is secured by the equipment having a book

value of P900,000 and a realizable value of P1,050,000.
 Of the accounts payable, P140,000 is secured by inventory which
has a cost of P120,000 and a liquidation value of P132,000.
 The balance of the inventory has a realizable value of P70,000.
 Receivables with a book value and realizable value of P624,000
and P600,000 respectively have been pledged as collateral on the note
payable. The balance of the receivable is estimated to be 60%
collectible.
 In addition to the recorded liabilities are accrued interest on bank loan
payable amounting to P30,000, accrued interest on the bonds payable
amounting to P18,000, trustee’s fee amounting P25,000 and taxes
payable amounting to P21,000.
 No recovery can be made for prepaid expenses and goodwill.

*Prepare a Statement of Affairs in July

SOLUTION:

Book Values Assets ERV Available for unsecured creditors

Pledged to fully secured creditors

924,000 Receivables (net) 600,000

Less: Note Payable 594,000 6000

Pledged to partially secured creditors:

120,000 Inventory 132,000

900,000 Property and Equipment 1,050,000

Total 1,182,000

Free Assets

396,000 Cash 396,000

300,000 Receivables (net) 180,000

111,000 Inventory 70,000

3,000 Prepaid Expenses -

120,000 Goodwill -

Total Free Assets 646,000 652,000

Less: Creditors with priority 166,000

Net Free Assets 486,000

Estimated deficiency 150,000

2,574,000 636,000

Book Values Liabilities and Stockholders’ Equity Secured and Unsecured nonpriority

priority claims liabilities

Liabilities with priority:

Taxes Payable 21,000

Trustees Expenses 25,000

120,000 Salaries Payable 120,000

 Total 166,000

Fully secured creditor:

594,000 Note Payable 594,000

Partially secured creditors

140,000 Accounts Payable 140,000

Less: Inventory 132,000 8,000

1,200,000 Bank Loan Payable 1,200,000

Interest payable 30,000

Less: Property and Equipment 1,050,000 180,000

Unsecured creditors:

160,000 Accounts Payable 160,000

270,000 Bonds Payable 270,000

Interest expense 18,000 448,000

Stockholders’ Equity

240,000 Ordinary shares - -

2,574,000 636,000

Recovery Rate = Available Assets / Unsecured Creditors

Recovery Rate = (652,000-166,000) / 636,000

Recovery Rate = 0.76

Problem II

The following data were taken from the statement of realization

and liquidation of XYZ Corporation for the quarter ended September
30, 2008:
Assets to be realized P 330,000
Assets acquired 360,000
Assets realized 420,000
Assets not realized 150,000
Liabilities to be liquidated 540,000
Liabilities assumed 180,000
Liabilities liquidated 360,000
Liabilities not liquidated 450,000
Supplementary credits 510,000
Supplementary charges 468,000

What is the net income (loss) for the period?

Solution:

Assets to be realized 330,000 Assets Realized

420,000
Assets Acquired 360,000 Assets not realized
150,000
Liabilities Liquidated 360,000 Liabilities to be Liquidated
540,000
Liabilities not Liquidated 450,000 Liabilities Assumed
180,000
Supplementary Debits 468,000 Supplementary Credits
510,000
1,968,000
1,800,000
Net Loss
168,000