INSOLVENCY - the most common reason why corporations liquidate

INSOLVENT - the total liabilities exceed its total assets which results in experiencing financial difficulty in paying
off debts.

Types of Insolvency (Insolvency Act of the Philippines)

a.​ Voluntary - the insolvent corporations voluntarily applies a petition to a court of law to be discharged from its
liabilities; or
b.​ Involuntary - three or more creditors of the insolvent corporation file a petition to a court of law for the
adjudication of the corporation as insolvent.

INSOLVENCY VS. ILLIQUIDITY

INSOLVENCY ILLIQUIDITY
inability to pay off debts because of LACK OF ASSETS inability to pay off debts because of SHORTAGE in
CASH or OTHER LIQUID ASSETS (Cash Equivalents)

LIQUIDATION - termination of business operations or the winding up of affairs. It is a process by which:

1.​ The assets of the business are converted into cash.
2.​ The liabilities of the business are settled.
3.​ Any remaining amount is distributed to the owners.

Measurement Basis
Assets​ ​ Realizable Value (Estimated Selling Price Less Estimated Costs to Sell/Disposal Costs)
Liabilities​ Expected Net Settlement Amount

Financial Reports
1.​ Statement of Affairs
2.​ Statement of Realization and Liquidation
3.​ Notes disclosures and summary of cash receipts and disbursement may also be prepared.

STATEMENT OF AFFAIRS
-​ shows the financial position of a liquidating entity - the assets that are available for sale, the claims of creditors
to be settled and the claims of the owners.
-​ similar to a regular statement of financial position or balance sheet, except that assets are measured at
realizable values (and liabilities at expected net settlement amounts), and the presentation is different.

Assets in the statement of affairs are classified into the following:

1.​ Assets pledged to fully secured creditors
-​ These are assets with realizable values EQUAL TO or GREATER THAN the expected net settlement
amounts of the related liabilities for which the assets have been pledged as security.
Example: Building with a realizable value of P1,000,000, pledged as security for a bank loan of P800,000.
The bank (creditor) is fully secured because it is guaranteed full payment for the loan. After the bank is
paid, the P200,000 excess is available to unsecured creditors.
2.​ Assets pledged to partially secured creditors
-​ These are assets with realizable values LESS THAN the expected net settlement amounts of the related
liabilities for which the assets have been pledged as security.
Example: Equipment with a realizable value of P500,000 that secures a bank loan of P800,000. The bank is
partially secured because it is guaranteed only P500,000 out of the P800,000 loan balance. The deficiency
on the loan payment must come from the proceeds of other assets.
3.​ Free Assets
 -​ These are assets that have not been pledged as security for liabilities. These also include the excess of
assets pledged to fully secured creditors over the related liabilities.
Example: Cash of P10,000 that can be used at the discretion of the entity. Another example is the
"P200,000 excess" in #1 above.

Liabilities in the statement of affairs are classified into the following:

1.​ Unsecured liabilities with priority
-​ These are liabilities that, although not secured by any asset, are mandated by law to be paid first before
other unsecured liabilities. Examples include payables for:
a.​ Administrative expenses, e.g., filing fees, attorney's fees, referee's fees, trustee's fees, and other
direct costs of the insolvency proceedings
b.​ Unpaid employee salaries and other benefits
c.​ Taxes and assessments
2.​ Fully secured creditors
-​ These are liabilities secured by assets with sufficient realizable values (see discussion on Assets pledged to
fully secured creditors).
3.​ Partially secured creditors
-​ These are liabilities secured by assets with insufficient realizable values (see discussion on Assets pledged
to partially secured creditors - of the P800,000 loan, P500,000 is a secured claim while P300,000 is an
unsecured claim).
4.​ Unsecured liabilities without priority
-​ All other liabilities not classifiable under (1), (2) or (3) above.

Illustrative Problem 1: Statement of Affairs

Bye-bye Corporation is undergoing liquidation. Relevant information is as of January 1, 20x1 is shown below:

ASSETS Carrying amounts Realizable values

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
Note 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 of P180,000 are expected to be incurred during the liquidation process.
• The equipment is pledged as collateral security for the note payable.
• The land is pledged as collateral security for the loan payable.
Requirements:
a.​ Compute for the amounts of the following: (1) Assets pledged to fully secured creditors; (2) Assets pledged to
partially secured creditors; and (3) Free assets and Net free assets.
b.​ Compute for the amounts of the following: (1) Unsecured liabilities with priority; (2) Fully secured liabilities; (3)
Partially secured liabilities; and (4) Unsecured liabilities without priority.
c.​ Compute for the estimated deficiency.
d.​ Compute for the estimated recovery percentage of unsecured creditors without priority.
e.​ Mr. A, an unsecured non-priority creditor, has a P500,000 claim. How can Mr. A expect to collect from Bye-bye
Corporation?
f.​ Prepare the statement of affairs.

Solution:
a.​ Compute for the amounts of the following:
Assets pledged to fully secured creditors
Land 1,300,000

Assets pledged to partially secured creditors

Equipment - net 150,000

Free assets and Net free assets​

Total assets at realizable value 2,100,000
Less: Secured creditors
Fully secured - Loan payable (750,000)
Partially secured - Note payable (up to the RV of equipment only) (150,000)
Total free assets 1,200,000
Less: Unsecured creditors with priority
Estimated administrative expenses (180,000)
Salaries payable (800,000)
Net free assets 220,000

b.​ Compute for the amounts of the following:

Unsecured liabilities with priority
Administrative expenses 180,000
Salaries payable 800,000
980,000
Fully secured liabilities
Loan payable 750,000

Partially secured liabilities

Note payable 500,000

Unsecured liabilities without priority

 Note payable - excess (500K - 150K RV of equipment) 350,000
Accounts payable 700,000
1,050,000

c.​ Compute for the estimated deficiency.

Net free assets 220,000
Unsecured liabilities without priority (1,050,000)
Deficiency to unsecured non-priority creditors (830,000)
​ ​ ​ OR
Total assets at realizable value 2,100,000
Total liabilities at settlement amount (2.75M + 180K) (2,930,000)

Estimated deficiency to unsecured non-priority creditors (830,000)

d.​ Compute for the estimated recovery percentage of unsecured creditors without priority.
Estimated recovery percentage of Net free assets
unsecured creditors w/out priority
= Total unsecured liabilities w/out priority
220,000
= 1,050,000

= 20.95%

e.​ Mr. A, an unsecured non-priority creditor, has a P500,000 claim. How can Mr. A expect to collect from
Bye-bye Corporation?
500,000 x 20.95% 104,750

f.​ Prepare the statement of affairs.

Bye-Bye Corporation
Statement of Affairs
As of January 1, 20x1
Available for unsecured
Book Values ASSETS Realizable values creditors
Assets pledged to fully secured creditors:
1,000,000 Land 1,300,000
Loan payable (750,000) 550,000

Assets pledged to partially secured creditors:

600,000 Equipment - net 150,000
Notes payable (500,000) -

Free assets:
200,000 Cash 200,000
500,000 Accounts receivable 450,000 650,000
Total free assets 1,200,000
Less: Unsecured liabilities with priority (980,000)
Net free assets 220,000
 Estimated deficiency (1,050,000 - 220,000) 830,000
2,300,000 Totals 1,050,000

Unsecured non-priority
Book Values LIABILITIES Realizable values liabilities
Unsecured liabilities with priority:
- Administrative expenses 180,000
800,000 Salaries payable 800,000 -

Fully secured creditors:

750,000 Loan payable 750,000 -

Partially secured creditors:

500,000 Notes payable 500,000
Equipment - net (150,000) 350,000

Unsecured creditors:
700,000 Accounts payable 700,000 700,000

(450,000) Shareholders' equity - -

2,300,000 Totals 1,050,000

Illustrative Problem 2: Statement of affairs

ABC Co. has filed for voluntary insolvency and is going to liquidate. ABC's statement of financial position prior to the
liquidation process is shown below:
ABC Co.
Statement of Financial Position
As of December 31, 20x0
ASSETS LIABILITIES AND EQUITY
Current assets: Current liabilities:
Cash 40,000 Accrued expenses 221,000
Accounts receivable 220,000 Current tax payable 350,000
Note receivable 100,000 Accounts payable 1,000,000
Inventory 530,000 1,571,000
Prepaid assets 10,000 Noncurrent liabilities:
900,000 Note payable (secured by equipment) 300,000
Noncurrent assets: Loan payable (secured by land and building) 2,000,000
Land 500,000 2,300,000
Building, net 2,000,000 Capital deficiency:
Equipment, net 300,000 Share capital 500,000
2,800,000 Retained earnings (deficit). (671,000)
(171,000)
Total assets 3,700,000 Total liabilities and equity 3,700,000
Additional information:
The following were determined before the start of the liquidation process:
a.​ Only 76% of the accounts receivable is collectible.
b.​ P10,000 interest is receivable on the note.
c.​ The inventory has an estimated selling price of P420,000 and estimated costs to sell of P10,000.
d.​ The prepaid assets are non-refundable.
e.​ The land and building have fair values of P2,000,000 and P800,000, respectively, but ABC Co. expects to sell
both assets at a package price of P2,600,000.
f.​ The equipment has an estimated net selling price of P200,000.
g.​ Administrative expenses of P30,000 are expected to be incurred in the liquidation process.
h.​ The accrued expenses include accrued salaries of P25,000.
i.​ P15,000 interest is payable on the loan.
j.​ All the other liabilities are stated at their expected net settlement amounts.

Requirement: Prepare the statement of affairs as of January 1, 20x1.

Solution:
Step 1: Restate the assets & liabilities
Assets are restated to realizable values, and liabilities to expected net settlement amounts. The difference
represents the estimated deficiency in the settlement to creditors and owners.
Book Values Realizable Value
Cash 40,000 40,000
Accounts receivable 220,000 (220,000 x 76%) 167,200
Note receivable 100,000 100,000
Interest receivable - 10,000
Inventory 530,000 (420,000 - 10,000) 410,000
Prepaid assets 10,000 -
Land and Building 2,500,000 2,600,000
Equipment, net 300,000 200,000
Total Assets 3,700,000 3,527,200

Accrued expenses 221,000 221,000

Current tax payable 350,000 350,000
Accounts payable 1,000,000 1,000,000
Note payable 300,000 300,000
Loan payable 2,000,000 2,000,000
Interest payable - 15,000
Estimated admin. expenses - 30,000
3,871,000 3,916,000
Estimated deficiency
Capital deficiency (171,000) (bal. figure) (388,800)
Total liabilities & equity 3,700,000 3,527,200

Notes:
●​ The land and building are restated to realizable values rather than fair values. Fair value favors "going concern"
while realizable value normally reflects a price in a forced sale transaction, which is the case for a liquidating
entity.
 ●​ The unrecorded assets and liabilities (i.e., interest receivable, interest payable and estimated administrative
expenses) are recognized.
●​ The difference between the restated assets and liabilities represents the estimated deficiency in the
settlement of unsecured non-priority creditors. If a deficiency exists, the claims of unsecured creditors
without priority will not be paid in full.

Step 2: Identify the classifications of the assets & liabilities

ASSETS

Assets pledged to fully secured creditors: Realizable value Available for unsecured creditors
Land and Building 2,600,000

Less: Loan payable (2,000,000)

Interest payable (15,000) 585,000

Assets pledged to partially secured creditors:

Equipment, net 200,000 -

Free Assets
Cash 40,000
Accounts receivable 167,200
Note receivable 100,000
Interest receivable 10,000
Inventory 410,000
Prepaid assets - 727,200
Total free assets 1,312,200

LIABILITIES
Unsecured liabilities with priority Secured and priority claims Unsecured liabilities without priority
Administrative expenses 30,000
Accrued salaries 25,000
Current tax payable 350,000
Total unsecured liabilities with priority 405,000 -

Fully secured creditors:

Loan payable 2,000,000
Interest payable 15,000
2,015,000 -
Partially secured creditors:
Note payable 300,000
Less: Equipment 200,000 100,000

Unsecured liabilities without priority

Accrued expense (221,000 - 25,000) 196,000
Accounts payable 1,000,000 1,196,000
Total unsecured liabilities without priority 1,296,000
Step 3: (Optional) Estimated recovery percentage
At this point, we can compute for the estimated recoveries of the creditors and owners. Since we have identified a
deficiency in Step 2, the unsecured creditors without priority will not be paid in full. The payments to them can be
determined using the estimated recovery percentage. The formula for this percentage is as follows:
Estimated recovery percentage of Net free assets
unsecured creditors w/out priority
= Total unsecured liabilities w/out priority

Total free assets 1,312,000

Less: Total unsecured liabilities with priority (405,000)
Net free assets 907,200
Divide by: Total unsecured liabilities without priority 1,296,000
Estimated recovery percentage of unsecured creditors w/out priority 70%

●​ The estimated amounts to be recovered by each class of creditor are computed as follows:

Total claims Recovery Percentage Estimated Recovery

Unsecured with priority 405,000 100% 405,000
Fully secured 2,015,000 100% 2,015,000
Partially secured 300,000 200K + (100K x 70%) 270,000
Unsecured without priority 1,196,000 70% 837,200
Shareholders None 0% -
Total assets at realizable values 3,527,200

In case of liquidation, all the creditors must be paid first before the owners. In this illustration, the unsecured
creditors without priority can only be paid partially; therefore, none will be paid to the shareholders.

Step 4: Statement of affairs

The statement of affairs is prepared as follows:
ABC Co.
Statement of Affairs
As of January 1, 20x1
Available for unsecured
Book Values ASSETS Realizable values creditors
Assets pledged to fully secured creditors:
2,500,000 Land and Building 2,600,000
Loan payable (2,000,000)
Interest payable (15,000) 585,000

Assets pledged to partially secured creditors:

300,000 Equipment - net 200,000
Note payable (300,000) -

Free assets:
40,000 Cash 40,000
220,000 Accounts receivable 167,200
 100,000 Note receivable 100,000
- Interest receivable 10,000
530,000 Inventory 410,000
10,000 Prepaid assets - 727,200
Total free assets 1,312,200
Less: Unsecured liabilities with priority (405,000)
Net free assets 907,200
Estimated deficiency (squeeze) (1,296M - 907.2K) 388,800
3,700,000 Totals 1,296,000

Unsecured non-priority
Book Values LIABILITIES AND EQUITY Realizable values liabilities
Unsecured liabilities with priority:
- Administrative expenses 30,000
25,000 Accrued salaries 25,000
350,000 Current tax payable 350,000
Total 405,000 -

Fully secured creditors:

2,000,000 Loan payable 2,000,000
- Interest payable 15,000 -

Partially secured creditors:

300,000 Notes payable 300,000
Equipment - net (200,000) 100,000

Unsecured creditors:
196,000 Accrued expense 196,000
1,000,000 Account payable 1,000,000 1,196,000

(171,000) Shareholders' equity - -

3,700,000 Totals 1,296,000

STATEMENT OF REALIZATION AND LIQUIDATION

The liquidation process may take some time before it is completed. Therefore, there is a need to provide periodic
financial reports that show information on the progress of the liquidation process, most especially when the
winding up of affairs is entrusted to a receiver (trustee). These financial reports take the form of a statement of
realization and liquidation.
The statement of realization and liquidation is depicted like a T-account. This presentation originated in the U.S. as
a legally oriented form.
Debits Credits
●​ Assets to be realized ●​ Assets realized
●​ Assets acquired ●​ Assets not realized
●​ Liabilities liquidated ●​ Liabilities to be liquidated
 ●​ Liabilities not liquidated ●​ Liabilities assumed
●​ Supplementary expenses ●​ Supplementary income

●​ Assets to be realized - represents the total non-cash assets available for disposal as at the beginning of the
period. This is measured at book value (carrying amount).
●​ Assets acquired - represents previously unrecorded assets that were recognized during the period. Similar
terms are "additional assets" or "new assets."
●​ Assets realized - represents the actual net proceeds from the conversion of non-cash assets into cash during
the period.
●​ Assets not realized - the unsold non-cash assets as at the end of the period, measured at book value.
Summary:
Non-Cash Assets
Beg.-Assets to be realized (excldg. cash) xx (a)
Additions: Assets acquired xx (b) xx (b) Disposals - Assets realized
xx (a) End - Assets not realized
(a) measured at book values
(b) measured at actual net proceeds

●​ Liabilities to be liquidated - represents the total liabilities to be settled as at the beginning of the period. This is
measured at book value.
●​ Liabilities assumed - represents previously unrecorded liabilities that were recognized during the period.
Similar terms are "additional liabilities" or "new liabilities."
●​ Liabilities liquidated - represents the actual net settlement amounts of liabilities paid during the period.
●​ Liabilities not liquidated - the unpaid liabilities as at the end of the period, measured at book value.
Summary:
Liabilities
xx (a) Beg. - Liabilities to be liquidated
Decreases - Liabilities liquidated xx (b) xx (a) Additions - Liabilities assumed
End. - Liabilities not liquidated xx (a)

(a) measured at book values

(b) measured at actual settlement amount
●​ Supplementary expenses / income - income and expenses realized/incurred during the period.
Assets and liabilities transferred to the receiver/trustee are presented separately from newly acquired (assumed)
assets (liabilities) in order to highlight the receiver/trustee's accountability. Actual amounts received (paid) on the
sale of assets (settlement of liabilities) are also presented.

The assets and liabilities are measured at book values in order to highlight the actual gains or losses from sale of
assets and settlement of liabilities (i.e., actual receipt/payment less carrying amount of asset/liability equals gain or
loss).

Because the beginning and ending balances of the assets and liabilities and the additions thereto are stated at book
values, while disposals and settlements are stated at actual amounts, the total debits and total credits in the
T-account will naturally not balance. The difference (balancing figure) represents the net gain or loss on the sale of
assets and settlement of liabilities during the period. This is similar to the procedure applied to an "income
summary" account.
Illustration: Statement of realization and liquidation
ABC Co. is going to liquidate. A receiver/trustee will administer the liquidation. ABC's financial position on Jan. 1,
20x1, before the start of the liquidation process, is summarized below:
Book Values
Cash 40,000
Accounts receivable 220,000
Note receivable 100,000
Inventory 530,000
Prepaid assets 10,000
Land 500,000
Building, net 2,000,000
Equipment, net 300,000
Total assets 3,700,000

Accrued expenses 221,000

Current tax payable 350,000
Accounts payable 1,000,000
Note payable (secured by equipment) 300,000
Loan payable (secured by land and building) 2,000,000
Total liabilities 3,871,000

Share capital 500,000

Retained earnings (deficit) (671,000)
Capital deficiency (171,000)

Total liabilities and equity 3,700,000

Additional information:
a.​ P10,000 interest is receivable on the note and P15,000 interest is payable on the loan.
b.​ Administrative expenses of P30,000 are expected to be incurred in the liquidation process.

The entry in the books of the receiver to record the transfer of custody over the assets and liabilities of ABC Co. is
as follows:
Jan. 1, 2021 Cash 40,000
Accounts receivable 220,000
Note receivable 100,000
Inventory 530,000
Prepaid assets 10,000
Land 500,000
Building 2,000,000
Equipment 300,000
Estate deficit (squeeze) 171,000
Accrued expenses 221,000
Current tax payable 350,000
Accounts payable 1,000,000
 Note payable 300,000
Loan payable 2,000,000
Notes:
●​ The receiver records the assets and liabilities at book values rather than realizable values and expected net
settlement amounts.
●​ The unrecorded interests are not included in the opening entry above. These are recorded separately and
identified as "new" assets and liabilities as follows:
Jan. 2, 2021 Interest receivable - new 10,000
Estate deficit 10,000
Jan. 2, 2021 Estate deficit 15,000
Interest payable - new 15,000
●​ The estimated administrative expenses are not recorded. These are recorded only when actually paid.
●​ Actual liquidation costs and gains and losses are subsequently recorded directly to the "estate" account. If this
account has a debit balance, it is referred to as "estate deficit;" if credit balance, as "estate equity."

A statement of realization and liquidation shows information on the progress of the liquidation process.
Accordingly, it is prepared at the end of each period (contrast this to the statement of affairs). The following
transactions occurred during the period:
a.​ Only P165,000 were collected on the accounts receivable. The remainder was written-off.
b.​ The interest on the note was collected in full, but only 90% was collected on the principal. The remainder was
written-off.
c.​ Half of the inventory was sold for P300,000. Actual costs to sell were P5,000.
d.​ The prepaid assets were written-off.
e.​ The land and building were sold for P2,600,000.
f.​ The equipment was sold for P220,000.
g.​ Of the total accrued expenses, only the accrued salaries of P25,000 were paid. The balance remains
outstanding.
h.​ The current tax payable was paid in full.
i.​ The interest and the principal on the loan were paid in full.
j.​ The note payable was settled for P220,000. The lender canceled the balance.
k.​ Administrative expenses of P27,000 were paid.

Journal entries (books of the receiver):

a. Cash 165,000
Estate deficit 55,000
Accounts receivable 220,000
Cash (10K + 100K x 90%) 100,000
b. Estate deficit 10,000
Notes receivable 100,000
Interest receivable 10,000
c. Cash (300K - 5K) 295,000
Inventory (530K x 50%) 265,000
Estate deficit 30,000
d. Estate deficit 10,000
Prepaid assets 10,000
e. Cash 2,600,000
Land 500,000
 Building 2,000,000
Estate deficit 100,000
f. Cash 220,000
Estate deficit 80,000
Equipment 300,000
g. Accrued expenses 25,000
Cash 25,000
h. Current tax payable 350,000
Cash 350,000
i. Loan payable 2,000,000
Interest payable 15,000
Cash 2,015,000
j. Note payable 300,000
Estate deficit 80,000
Cash 220,000
k. Estate deficit 27,000
Cash 27,000
The amounts to be presented in the statement of realization and liquidation are identified as follows:
●​ Assets to be realized are P3,660,000, the book value of non-cash assets transferred by ABC Co. to the receiver
(P3.7M total assets less P40,000 cash).
●​ Assets acquired are P10,000, the unrecorded interest receivable.
●​ Assets realized are equal to the actual net proceeds from the conversion of the non-cash assets into cash:
a. Collection of accounts receivable 165,000
b. Collection of interest and note 100,000
c. Sale of inventory 295,000
e. Sale of land and building 2,600,000
f. Sale of equipment 220,000
Assets realized 3,380,000

●​ Assets not realized are P265,000, the book value of the unsold inventory (P530,000 x 50%).
●​ Liabilities to be liquidated are P3,871,000, the book value of the liabilities transferred by ABC Co. to the receiver.
●​ Liabilities assumed are P15,000, the unrecorded interest payable.
●​ Liabilities liquidated are equal to the actual payments on the liabilities:
g. Payment for accrued salaries 25,000
h. Payment for current tax payable 350,000
i. Payment for interest and loan 2,015,000
j. Payment for note payable 220,000
Liabilities liquidated 2,610,000

●​ Liabilities not liquidated is equal to the book value of the unpaid liabilities:
Accrued expenses (221K - 25K accrued salaries) 196,000
Accounts payable 1,000,000
Liabilities not liquidated 1,196,000

●​ Supplementary expense is P27,000, the administrative expenses paid during the period.
●​ There is no supplementary income during the period.

The net gain (loss) during the period is computed as follows:

Debits Credits
Assets to be realized 3,660,000 3,380,000 Assets realized
Assets acquired 10,000 265,000 Assets not realized
Liabilities liquidated 2,610,000 3,871,000 Liabilities to be liquidated
Liabilities not liquidated 1,196,000 15,000 Liabilities assumed
Supplementary expenses 27,000 - Supplementary income
Totals 7,503,000 7,531,000 Totals
Net gain - excess of Cr. over Dr. 28,000

The statement of realization and liquidation is prepared as follows:

ABC Co. in receivership
Statement of Realization and Liquidation
For the six months ended June 30, 20x1
ASSETS
Assets to be realized: Assets realized:
Accounts receivable 220,000 Accounts receivable 165,000
Note receivable 100,000 Note receivable 90,000
Inventory 530,000 Interest receivable 10,000
Prepaid assets 10,000 Inventory 295,000
Land and building 2,500,000 Land and building 2,600,000
Equipment, net 300,000 Equipment 220,000
Total 3,660,000 Total 3,380,000

Assets acquired: Assets not realized:

Interest receivable 10,000 Inventory 265,000

LIABILITIES
Liabilities liquidated: Liabilities to be liquidated:
Accrued expenses 25,000 Accrued expenses 221,000
Current tax payable 350,000 Current tax payable 350,000
Interest payable 15,000 Accounts payable 1,000,000
Loan Payable 2,000,000 Note payable 300,000
Note payable 220,000 Loan Payable 2,000,000
Total 2,610,000 Total 3,871,000

Liabilities not liquidated: Liabilities assumed:

Accrued expenses 196,000 Interest payable 15,000
Accounts payable 1,000,000
Total 1,196,000

SUPPLEMENTARY ITEMS
 Supplementary expenses: Supplementary income:
Administrative expenses 27,000 -
Net gain during the period 28,000
7,531,000 7,531,000

To compute the net gain, get the sum of the debits and credits to the estate deficit account in journal entries (a) to (k).
Breakdown of net gain on a per account basis:
Book values Net proceeds Gain (Loss)
ASSETS
Cash 40,000 - -
Accounts receivable 220,000 165,000 (55,000)
Note receivable 100,000 90,000 (10,000)
Interest receivable 10,000 10,000 -
Inventory - sold (half) 265,000 295,000 30,000
Inventory - unsold (half) 265,000 - -
Prepaid assets 10,000 - (10,000)
Land and building 2,500,000 2,600,000 100,000
Equipment 300,000 220,000 (80,000)
Total 3,710,000 3,380,000 (25,000)
LIABILITIES
Accrued expenses - settled 25,000 (25,000) -
Accrued expenses - unsettled 196,000 - -
Current tax payable 350,000 (350,000) -
Accounts payable 1,000,000 - -
Note payable 300,000 (220,000) 80,000
Loan payable 2,000,000 (2,000,000) -
Interest payable 15,000 (15,000) -
Total 3,886,000 (2,610,000) 80,000
SUPPLEMENTARY ITEMS
Administrative expenses (27,000) (27,000)
Net gain during the period 28,000

Ending Balance of Cash

Beginning balance + Assets realized
Less: Liabilities liquidated + Administrative expenses

Reconciliation of cash by using the basic accounting equation:

ASSETS = LIABILITIES + EQUITY
Cash 783,000 Liabilities not liquidated 1,196,000
Assets to be realized 265,000 Estate deficit (148,000)
Total 1,048,000 Total 1,048,000