FORMATIVE ASSESSMENT

1. When is a “Statement of Affairs” used?

In both liquidations and reorganizations

2. Typically, the estimated amount available for short-term prepayments in a statement of affairs, is:
Zero

3. What is defined as a condition in which a company is unable to meet debts as the debt matures?
Insolvency

4. Which of the following is first-ranked of the unsecured liabilities with priority in bankruptcy liquidation?
Administrative cost

5. Statement 1: Unsecured creditors whose claims are to be paid in full from the assets of a debtor in
bankruptcy liquidation before any cash is paid to other unsecured creditors are classified as unsecured
creditors having preference.
Statement 2: Creditors having priority under the Bankruptcy Law include creditors having security
interests collateralized by specific assets of the debtor.
Both statements are false.

6. In reporting a company that is to be liquidated, assets are shown at

Net realizable value

7. How are the liabilities classified in the Statement of Affairs?

Secured and unsecured

8. The document used by a trustee to report periodically on the status of fiduciary activities is called a/an
Statement of Realization and Liquidation

9. Statement 1: Creditors having security interests collateralized by specific assets of a debtor in

bankruptcy liquidation are entitled to obtain satisfaction of their claims from the free assets of the
debtor’s estate.
Statement 2: Creditors having security interest collateralized by specific assets of a debtor in
bankruptcy liquidation always have a 100% recovery rate.
Both statements are false.

10. The document used to estimate amounts available to each class of claims is called a/an
Accounting Statement Affairs

11. Goodbye Na Corp. has been undergoing liquidation since January 1. As of March 31, its condensed
statement of realization and liquidation is presented below:

12. On June 1, 2020, the books of Dreamer Corp. show assets with book values and realizable values as
follows:

13. On June 1, 2020, the books of Dreamer Corp. show assets with book values and realizable values as
follows:
 14. Target Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims.
Unsecured claims will be paid at the rate of thirty cents on the peso. Arrow holds a note receivable from
Target for P90,000 collateralized by an asset with a book value of P60,000 and a liquidation value of
P30,000. The amount to be realized by Arrow on this note is
P48,000

15. Sparkman Co. filed a bankruptcy petition and liquidated its noncash assets. Sparkman was paying forty
cents on the peso for unsecured claims. Bailey Co. held a mortgage of P150,000 on the land that was
sold for P110,000. The total amount of payment that Bailey should have received is calculated to be
P126,000

Account Book value Realizable value

Cash

Accounts receivable (net)

 ENABLING ASSESSMENT
1. Pag-asa Corporation is undergoing liquidation. The statement of affairs shows the following information:

ASSETS Carrying Amount Realizable Value

Assets pledged with fully secured creditors 160,000 190,000

Assets pledged with partially secured creditors 90,000 6,0000

Free Assets 200,000 140,000

450,000 390,000

LIABILITIES

Liabilities with priority 20,000 20,000

Fully secured creditors 130,000 130,000

Partially secured creditors 100,000 100,000

Unsecured creditors 260,000 260,000

510,000 510,000

● If all the assets were sold at their realizable values and all the liabilities were settled at their
expected settlement amount, the amount that partially secured creditors will receive is ___.
84000

● If all the assets were sold at their realizable values and all the liabilities were settled at their
expected settlement amount, the amount that unsecured creditors will receive is ___.
156000

2. Stopna Corporation filed a voluntary bankruptcy during the year. Relevant information follows:

ASSETS Carrying Amount Realizable Value

Assets pledged with fully secured creditors 300,000 370,000

Assets pledged with partially secured creditors 180,000 120,000

Free assets 420,000 320,000

900,000 810,000

LIABILITIES

Liabilities with priority 70,000

Fully secured creditors 260,000

Partially secured creditors 200,000

Unsecured creditors 540,000

 1,070,000

The assets are converted to cash at the estimated realizable values and the business is liquidated.

● The amount of cash available to pay unsecured non-priority claims is ___.

360000

● The estimated recovery percentage of unsecured creditors without priority is ___.

58.06%

● The total amount paid to the partially secured creditors is ___.

166448

● The total amount paid to the unsecured creditors is ___.

313524

● The total amount paid to the fully secured creditors is ___.

260000

● The total amount paid to the unsecured creditors with priority is ___.
70000

3. Moveon Corporation is undergoing liquidation. Relevant information follows:

Carrying Amount Realizable Value

Assets pledged with partially 80,000 50,000

secured creditors

Free assets 220,000 160,000

Expected settlement amount Amount unsecured

Liabilities with priority 16,000 -

Partially secured creditors 75,000 25,000

Unsecured creditors 155,000 155,000

● The estimated amount of liquidating dividend per peso claim is ___.

0.80

● The total amount available for payment of claims of unsecured creditors is ___.
144000

● The amount of deficiency to creditors is ___.

36000
4. A trustee has been appointed by SEC for ELM Inc., which is being liquidated. The following
transactions occurred after the assets were transferred to the trustee:
a. Sales on account by the trustee were P75,000. Cost of goods sold were P60,000, consisting of
all the inventory transferred from ELM.
b. The trustee sold P12,000 worth of marketable securities for P10,500.
c. Receivables collected by the trustee:

Old P21,000 of the P38,000 transferred

New P47,000

d. Recorded P16,000 depreciation on the plant assets of P96,000 transferred from ELM.
e. Disbursements by the trustee:

Old current payable P22,000 of the P48,000 transferred

Trustee’s expenses P4,300

● In the statement of realization and liquidation of ELM Inc., the total assets to be realized is ___.
206000

● The total assets realized is ___.

153500

● The net gain (loss) is ___.

(6800)

5. Items displayed in the June 30, 2020, statement of affairs for Liquidating Company, which is
undergoing bankruptcy liquidation, included the following:

Assets pledged for fully secured liabilities 190,000

Assets pledged for partially secured liabilities 46,600

Free assets 146,330

Fully secured liabilities 183,600

Partially secured liabilities 54,600

Unsecured liabilities with priority 30,810

Unsecured liabilities without priority 182,500

● The expected percentage expected to be recovered by unsecured liabilities without priority

is ___.
64.0%

● The expected percentage expected to be recovered by fully secured liabilities is ___.

100.0%
 ● The expected percentage expected to be recovered by partially secured liabilities is ___.
94.7%

● The expected percentage expected to be recovered by unsecured liabilities with priority is

___.
100.0%

6. Hikahos Corporation is undergoing liquidation. Relevant information as of January 1, 2021 is shown

below:

ASSETS Carrying Amount Net Realizable Value

Cash 200,000 200,000

Accounts Receivable 500,000 450,000

Equipment-net 600,000 150,000

Land 1,000,000 1,300,000

Total Assets 2,300,000 2,100,000

LIABILITIES

Accounts Payable 700,000 700,000

Salaries Payable 800,000 800,000

Notes Payable 500,000 500,000

Loan Payable 750,000 750,000

Total Liabilities 2,750,000 2,750,000

EQUITY

Share Capital 1,000,000

Deficit (1,450,000)

Capital Deficiency (450,000)

Total Liabilities and Equity 2,300,000

Additional information:

❏ Administrative expenses expected to be incurred during the liquidation process is P180,000.

❏ The equipment is pledged as collateral security for the notes payable.
❏ The land is pledged as collateral security for the loan payable.

● The estimated recovery percentage is ___.

20.95%
 ● Assuming all the assets were sold, and all the liabilities were settled, Ms. E, an unsecured and
non-priority creditor would expect to receive from her P500,000 claim from Hikahos Corporation
an amount equal to ___.
104762

● The net free assets amount to ___.

220000

● The estimated deficiency is ___.

830000

7. Olive Company recently petitioned for bankruptcy andis now in the process of preparing a statement of
affairs. The carrying values and estimated fair values of the assets of Olive Company are as follows:

Carrying Value Fair Value

Cash 20,000 20,000

Accounts receivable 45,000 30,000

Inventory 60,000 35,000

Land 75,000 70,000

Building (net) 180,000 100,000

Equipment 170,000 80,000

Total 550,000 335,000

Debts of Olive are as follows:

Accounts payable 60,000

Wages payable (all have priority) 10,000

Taxes payable 10,000

Notes payable (secured by receivable and inventory) 120,000

Interest on notes payable 6,000

Bonds payable (secured by land and building) 150,000

Interest on Bonds payable 7,000

Total 363,000

● The total amount of unsecured claims is ___.

121000

● The estimated amount available for general unsecured creditors upon liquidation is ___.
93000
 ● The estimated dividend percentage is ___.
77%

8. On June 1, 2020, the books of Coco Corporation show assets with book values and realizable values
as follows:

Book Value Realizable Value

Cash 10,000 10,000

Receivables (net) 100,000 50,000

Inventory 140,000 100,000

Land and building (net) 600,000 650,000

Equipment (net) 400,000 100,000

Total 1,250,000 910,000

Coco’s books show the following liabilities:

Book value

Accounts payable 260,000

Wages payable (eligible for priority) 10,000

Taxes payable 20,000

Accrued interest on notes payable 30,000

Accrued interest on mortgage payable 20,000

Notes payable (secured by receivables and inventory) 500,000

Mortgage payable (secured by land and building) 300,000

Total 1,140,000

● The amount available to unsecured claims is ___.

410000

● The amount the note holders are likely to receive is ___.

393580

● The dividend (% expected to be recovered) of the unsecured claims is ___.

64.1%

● The estimated dividend percentage is ___.

64.1%
9. Buhay Corp. is undergoing liquidation. Relevant information follows:

Carrying amount

Accounts receivable 300,000

Inventories 110,000

Land 150,000

Building 400,000

❏ The accounts receivable has a realizable value of P320,000. The accounts receivable has been
pledged to secure notes payable with an expected settlement amount of P280,000.
❏ The inventories have a total realizable value of P70,000. Included in the inventories are
inventories with carrying amount of P50,000 and realizable value of P60,000 which have been
pledged to secure an account payable with an estimated settlement amount of P40,000.
❏ The land and building have a total realizable value of P450,000. Both assets have been used as
collateral security for a bank loan of P250,000.

● The total amount of net free assets is ___.

270000

● The estimated amount available for preferred claims and unsecured creditors out of assets
pledged with fully secured creditors is ___.
240000

10. A company going through a bankruptcy has the following account balances:

Cash 30,000

Receivable (30% collectible) 50,000

Inventory (worth P39,000) 90,000

Land (worth P120,000, secures note payable) 100,000

Buildings (worth P180,000, secures bond payable) 200,000

Salaries payable 10,000

Account payable 90,000

Notes payable (secured by land) 110,000

Bonds payable (secured by building) 300,000

Common stock 100,000

Retained earnings 140,000

● The amount paid to Note Payable is ___.

110000
 ● The amount paid to Accounts Payable is ___.
36000

● The amount paid to Salaries Payable is ___.

10000

● The amount paid to Bonds Payable is ___.

228000

11. Owners’ equity amounts are not displayed in a statement of affairs.

True

12. A statement of affairs is the initial report prepared at the start of the liquidation process.
True

13. In the accountability technique of accounting used by a trustee for a debtor in bankruptcy liquidation,
there is no ledger account for owner’s equity.
True

14. Liabilities in the statement of affairs are classified into short-term and long-term liabilities.
False

15. Voluntary insolvency occurs when three or more creditors of the insolvent corporation file a petition to a
court of law for the adjudication of the corporation as insolvent.
False

16. Creditors having priority under the Bankruptcy Law include creditors having security interests
collateralized by specific assets of the debtor.
False

17. A debtor in bankruptcy liquidation will not be discharged within six years of a previous bankruptcy
discharge.
True

18. Unsecured creditors whose claims are to be paid in full from the assets of a debtor in bankruptcy
liquidation before any cash is paid to other unsecured creditors are classified as unsecured creditors
having preference.
False

19. All stockholders of a corporation undergoing bankruptcy reorganization must approve the plan or
reorganization before it is confirmed by the bankruptcy court.
False

20. Assets in a statement of affairs are assigned to one of three categories:assets pledged for fully secured
liabilities, assets pledged for partially secured liabilities, and priority assets.
False
21. The bankruptcy court has the option of appointing either a trustee or an examiner in bankruptcy
reorganization.
False

22. Insolvency in the bankruptcy sense is a financial status in which the aggregate current fair value of the
assets of a business enterprise is not sufficient to pay the enterprise’s liabilities.
True

23. Assets in the statement of affairs are classified into current and non-current assets.
False

24. Assets pledged to fully secured creditors have realizable values equal to or greater than the realizable
values of the related liabilities for which these assets have been pledged as security.
True

25. The filing of a debtor’s petition in bankruptcy does not operate as an order for relief by the bankruptcy
court.
False

26. Creditors having security interests collateralized by specific assets of a debtor in bankruptcy liquidation
are entitled to obtain satisfaction of their claims from the free assets of the debtor’s estate.
False

27. Free assets include the excess of realizable values of assets pledged to fully secured creditors over the
realizable values of the related liabilities for which these assets have been pledged.
True

28. A railroad corporation may not file a debtor’s petition for bankruptcy.
True

29. Entities undergoing liquidation measure their assets and liabilities in the statement of affairs at fair
value.
False

30. The measurement bases under the Conceptual Framework and the PFRS are not applicable to
liquidating entities.
True

31. Assets pledged to partially secured creditors have realizable values less than the realizable values of
the related liabilities for which these assets have been pledged as security.
True