LIQUIDATION OF A CORPORATION

A corporation is considered insolvent when it is unable to pay its debts as they come due, or when its
total debts exceed the fair value of its assets. The inability to make payments in due course is referred to
as equity insolvency, whereas, having total debts that exceed the fair value of total assets is referred
to as bankruptcy insolvency. Debtor Corporation that are insolvent in the equity sense may be able to
avoid bankruptcy proceedings by negotiating an agreement directly with creditors which we call debt
restructuring, whereas, Debtor Corporation that are insolvent in the bankruptcy sense will ordinarily be
reorganized or liquidated under the supervision of a bankruptcy court.
What we will discuss only in this handout will be about liquidation of a corporation. The following
financial reports are prepared to aid the creditors and the court as to the progress of the liquidation.

STATEMENT OF AFFAIRS
An accounting statement that does provide relevant information for a liquidating company is
referred as the statement of affairs. This statement is a legal document prepared for the bankruptcy
court. The accountant’s statement of affairs is a financial statement that emphasizes liquidation values
and provides relevant information for the trustee in liquidating the debtor corporation. It also provides
information that may be useful to creditors and to the bankruptcy court. A statement of affairs is
prepared as of a specific date, and its shows balance sheet information with assets measured at expected
net realizable values and classified on the basis of availability for fully secured, partially secured, priority,
and unsecured creditors. Liabilities are classified in the statement of affairs as priority, fully secured,
partially secured, and unsecured. Historical cost valuations are also included in the statement for
reference purposes. An example is shown below. The following information was taken from the
Statement of Affairs filed by S Corporation to the bankruptcy court on August 1, 2018:

S Corporation
Statement of Affairs
August 1, 2019

Assets
Realizable Values - Realizable values
Liability Offsets for Available for
Book value Secured Creditors Unsecured Creditor
Pledged for Fully Secured Creditors
P 55,000 Land and building – net P60,000
Less: Mortgage payable P50,000
Interest payable 5,000 55,000 P 5,000

Pledged for Partially Secured Creditors

25,000 Accounts receivable P22,000
Less: Notes payable to bank P25,000
Interest payable 2,000 27,000 0

Available for Priority and Unsecured Creditors

3,000 Cash 3,000
7,000 Marketable securities 7,000
50,000 Inventories 55,000
4,000 Prepaid expenses 0
30,000 Equipment – net 12,000
6,000 Intangible assets 0
Total available for priority and unsecured creditors 82,000
Less: Priority liabilities 15,000
Total available for unsecured creditors 67,000
 Estimated deficiency 8,000
P180,000 P75,000
Liabilities and Stockholders’ Equity
Book Secured and Unsecure
Value Priority Claims Non-priority
Claims Priority Liabilities
P 13,000 Wages payable P 13,000
Property taxes payable 2,000
P 15,000
Fully Secured Creditors
50,000 Mortgage payable P 50,000
5,000 Interest payable 5,000
P55,000
Partially Secured Creditors
25,000 Notes payable - bank P25,000
5,000 Interest payable 2,000
P27,000
Less: Accounts receivable pledged 22,000 P 5,000
Unsecured Creditors
65,000 Accounts payable 65,000
5,000 Notes payable to suppliers 5,000
Stockholders’ Equity
200,000 Capital stock
( 187,000) Retained earnings .
P180,000 P75,000
Determine the estimated amount payable per peso of unsecured nonpriority liability.
Answer: P67,000/P75,000 = P0.8933 per peso

STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS

This statement shows the beginning balance of cash, the various sources of cash, example, collection of
accounts, sales of assets and refund of prepaid items and also shows the various uses of cash, example
the payment of various expenses and liabilities. All disbursements require the approval of the court, so
the statement should be a useful financial summary. An example is shown below:

S Corporation in Trusteeship
Statement of Cash Receipts and Disbursements
From August 1 to August 31, 2019
Cash balance, August 1, 2019 P 3,000
Add: Cash receipts
Sale of inventory items P30,000
Sale of equipment 14,200
Sale of land and building 64,000
Refund from insurance policy 1,000
Collection of receivables 21,000
Total cash receipts 130,200
133,200
Deduct: Cash disbursements
Wages payable (priority claim) P13,000
Property taxes payable (priority claim) 2,000
Mortgage payable and interest (fully secured) 55,000
Bank note payable and interest (for secured portion) 21,000
Administrative expense (priority item) 3,000
 Total cash disbursements 94,000
Cash balance, August 31, 2019 P 39,200

STATEMENT OF CHANGES IN ESTATE EQUITY

This statement shows the losses and gains from sale of noncash assets, the losses from the write-offs of
intangible assets, accounts written off, discovered liabilities, expenses paid like trustees fees, etc.
Therefore, the statement explains the changes on the estate equity (owners’ equity), for a certain period
of time resulting from the liquidation of the corporation. An example is shown below:

S Corporation in Trusteeship
Statement of Changes in Estate Equity
From August 1 to August 31, 2019
Estate equity August 1, 2019 P 13,000
Less: Net loss on asset liquidation (see schedule below)P 18,800
Liability for utilities discovered 500
Administrative expenses 3,000
Trustee’s fee 2,000
Net decrease for the period ( 24,300)
Estate deficit August 31, 2019 P 11,300

Schedule of Net Losses on Asset Liquidation

Book value Proceeds on Gain or

August 1 Realization (loss)
Accounts receivable P25,000 P21,000 P( 4,000)
Inventories 50,000 48,000 ( 2,000)
Land and building 55,000 64,000 9,000
Equipment 30,000 14,200 (15,800)
Intangible assets 6,000 0 ( 6,000)
Net loss on liquidation of assets P (18,800)

STATEMENT OF REALIZATION AND LIQUIDATION

This statement is an activity statement that is intended to show progress toward the liquidation of a
debtor’s estate. Its original purpose is to inform the bankruptcy court and interest creditors of the
accomplishments of the trustee. An example is shown below:
Below is an illustrative statement of realization and liquidation of Apple Company which is under
receivership, for the month ended December 31, 2019.

Apple Company in Receivership

Star, Receiver
Statement of Realization and Liquidation
For the Month Ended December 31, 2019

Assets
Assets to be realized: Assets realized:
Marketable securities P 15,000 Marketable securities P 18,500
Accounts receivable 30,000 Accounts receivable 11,500
Merchandise 50,000 Assets not realized:
Assets acquired: Accounts receivable 22,000
Accounts receivable 5,000 Merchandise 20,000
Liabilities
Liabilities liquidated: Liabilities to be liquidated:
Accounts payable 35,000 Accounts payable 65,000
Liabilities not liquidated: Liabilities assumed:
Accounts payable 31,500 Accounts payable 1,500
Accrued expenses 350
Profit and Loss
Supplementary charges: Supplementary credits:
Purchases 1,500 Sales on account 5,000
Payment of expenses of Interest on marketable securities 150
receivership 7.500 Sales for cash 25,000

Determine the net income or loss for the period.

Answer: Assets:
Total assets to be realized P 95,000
Total assets acquired 5,000
P100,000
Total assets realized P 30,000
Total assets not realized 42,000
P 72,000 P28,000 net loss
Liabilities
Total liabilities to be liquidated P 65,000
Total liabilities assumed 1,500
P 66,500
Total liabilities liquidated P 35,000
Total liabilities not liquidated 31,850
66,850 P 350 net loss
Profit and Loss
Supplementary credits P 30,150
Supplementary debits 9,000 P21,150 net income
Net loss for the period P 7,200 net loss

DISCUSSION PROBLEMS

PROBLEM 1
The following information is available on June 1, 2017 to Samsung Company,
which is having difficulty in paying its liabilities as they become due:
Carrying
Amount
Cash P 8,960
Accounts receivable, net, fair value equal to carrying amount 103,040
Inventories, current fair value , P40,320 pledged on P47,040
of notes payable 87,360
Machinery and equipment, net, current fair value of P150,976
pledged on mortgage note payable 239,680
Office supplies, current fair value of P5,600 4,480
Wages payable 12,992
Taxes payable 2,688
Accounts payable 134,400
 Notes payable, P47,040 of which is secured by inventories 89,600
Mortgage note payable 112,896
Common stock, P5 par 224,000
Retained earnings, deficit 133,056

Additional information:
(1) Estimated liability to the trustee is P58,240.
(2) A delivery van previously given to the supervisor was returned to the
company, fair market value, P56,000.
REQUIRED:
a) Prepare a statement of affairs as of June 1, 2017.
b) Compute the estimated recoverable amounts to the different types of
creditors in the event of liquidation.
c) Prepare a statement of deficiency to unsecured creditors.

PROBLEM 2
SMDC Corp. a closely-held corporation was undergoing liquidation. The total
cash value of SMDC ’s bankruptcy estate after the sale of all assets and
payment of administrative expenses is P100,000.

SMDC has the following creditors:

• BDO Bank is owed P75,000 on a mortgage loan secured by SMDC ’s real

property. The property was valued at and sold, in bankruptcy, for
P70,000.
• The BIR has a P12,000 recorded judgment for unpaid corporate income
tax.
• National Office Supplies has an unsecured claim of P3,000 that was
timely filed.
• ACE Electric Company has an unsecured claim of P10,000 that was
timely filed.
• REH Publications has a claim of P16,000, which is secured by SMDC ’s
inventory that was valued and sold, in bankruptcy, for P2,000. The
claim was timely filed.

REQUIRED:
a) Calculate the total amount recoverable by partially-secured
creditors.
b) Calculate the total amount recoverable by unsecured creditors with
priority.
c) Calculate the total amount recoverable by fully secured creditors.
d) Calculate the total amount recoverable by unsecured creditors without
priority.

PROBLEM 3
The following data were taken from the statement of affairs of ROBINSONS
Corp.:
Assets pledged for fully secured liabilities (current fair
value, P75,000) P90,000
Assets pledged for partially secured liabilities (current
fair value P52,000) 74,000
Free assets (current fair value, P40,000) 70,000
Unsecured liabilities with priority 7,000
Fully secured liabilities 30,000
Partially secured liabilities 60,000
Unsecured liabilities without priority 112,000
1. The amount that will be paid to creditors with priority is:
a. P7,000 b. P6,000 c. P7,500 d. P6,200

2. The amount to be paid fully secured creditors is:

a. P30,000 b. P32,000 c. P20,000 d. P35,000

3. The amount to be paid to partially secured creditors is:

a. P52,700 b. P57,200 c. P56,200 d. P 57,000

4. The amount to be paid to unsecured creditors:

a. P78,200 b. P70,800 c. P72,000 d. P72,800

PROBLEM 4
A company that was to be liquidated had the following liabilities:
Income Taxes 10,000
Notes Payable secured by land 100,000
Accounts Payable 251,050
Salaries Payable 12,950
Administrative expenses for liquidation 20,000

The company had the following assets: Book Fair

Value Value
Current assets 100,000 95,000
Land 50,000 75,000
Building 150,000 200,000

Determine the following:

1. Total free assets:
A. 75,000 C. 275,000
B. 270,000 D. 295,000

2. Total liabilities with priority:

A. 19,000 C. 42,950
B. 37,950 D. 44,000

3. Net Free assets:

A. 226,000 C. 251,000
B. 247,050 D. 252,050

4. Total unsecured liabilities:

A. 244,000 C. 276,050
B. 251,050 D. 285,000

PROBLEM 5
The following information are related to STANK Corporation which is
undergoing liquidation:
a. A bank loan amounting to P455,000 is secured by inventories with
book value of P525,000 and net realizable value of P350,000.
b. Of the P1,120,000 accounts payable, P343,000 is secured by
accounts receivable amounting to P413,000 which is 10%
uncollectible.
c. Property and equipment costing P875,000 and which is depreciated
by 20% has a net realizable value of P588,000.
d. Other unrecorded liabilities are accrued interest payable on bank
loan, P45,500; salaries payable, P112,000; taxes payable, P63,000
and trustee’s fee, P52,500.
 e. Cash available before liquidation amounts to P87,500.

Compute for the estimated deficiency to unsecured creditors.

A. 450,800 C. 927,500
B. 882,000 D. 980,000

PROBLEM 6
The following data were taken from the statement of realization and
liquidation of CRASHED CO.
Assets to be realized 1,375,000 Assets acquired 750,000
Supplementary credits 2,800,000 Assets realized 1,200,000
Liabilities to be 2,250,000 Liabilities assumed 1,625,000
liquidated
Supplementary charges 3,125,000 Assets not realized 1,375,000
Liabilities liquidated 1,875,000 Liabilities not 1,700,000
liquidated
The ending balances of capital stock and retained earnings are P1,500,000 and
P238,000, respectively. A net loss of P738,000 was reported for the period.

What is the net gain/(loss) for the three-month period?

A. (325,000) C. 425,000
B. 250,000 D. 750,000

How much is the ending balance of cash?

A. 425,000 C. 1,325,000
B. 575,000 D. 1,375,000

PROBLEM 7
On December 31, 2019, the statement of affairs of BANKRUPT COMPANY, which is
in bankruptcy liquidation, included the following:
Assets pledged for fully secured liabilities 100,000
Assets pledged for partially secured liabilities 40,000
Free Assets 120,000
Fully secured liabilities 80,000
Partially secured liabilities 50,000
Unsecured liabilities with priority 60,000
Unsecured liabilities without priority 90,000

Compute the amount paid to:

Fully Secured Unsecured Partially Unsecured
Liabilities Liabilities w/ Secured Liabilities w/o
Priority Liabilities Priority
A. 80,000 60,000 50,000 70,000
B. 64,000 60,000 48,000 88,000
C. 80,000 48,000 60,000 72,000
D. 80,000 60,000 48,000 72,000