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Accounting For Special Transactions (Corporate Liquidation) : Lecture Aid

The document discusses accounting for corporate liquidation. It defines liquidation as terminating business operations by converting assets to cash, settling liabilities, and distributing any remaining amounts to owners. For liquidating entities, assets and liabilities are measured at realizable value, estimated as selling price less costs to sell for assets and expected net settlement amount for liabilities. Liquidating entities prepare a statement of affairs showing classified assets and liabilities, and a statement of realization and liquidation.

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127 views7 pages

Accounting For Special Transactions (Corporate Liquidation) : Lecture Aid

The document discusses accounting for corporate liquidation. It defines liquidation as terminating business operations by converting assets to cash, settling liabilities, and distributing any remaining amounts to owners. For liquidating entities, assets and liabilities are measured at realizable value, estimated as selling price less costs to sell for assets and expected net settlement amount for liabilities. Liquidating entities prepare a statement of affairs showing classified assets and liabilities, and a statement of realization and liquidation.

Uploaded by

mo
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ACCOUNTING FOR

SPECIAL TRANSACTIONS
(Corporate Liquidation)

LECTURE AID
Corporate Liquidation

Learning Objectives
 Describe the accounting for non-going concern entities.
Corporate Liquidation

 Liquidation – is the 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, and
3. Any remaining amount is distributed to the owners.
Measurement basis

For entities undergoing liquidation, the appropriate measurement


basis is realizable value.
 For assets, realizable value is estimated selling price less estimated
costs to sell.
 For liabilities, realizable value is the expected net settlement
amount.
Financial reports

 Liquidating entities usually prepare the following classes


of financial reports:
1. Statement of affairs
2. Statement of realization and liquidation
Statement of affairs

 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 realizable values of the related liabilities for which these assets
have been pledged as security.
 
2. Assets pledged to partially secured creditors – these are assets with realizable values less
than the realizable values of the related liabilities for which these assets have been
pledged as security.

3. Free assets – these are assets that have not been pledged as security of liabilities. These
also include the excess of realizable values of assets pledged to fully secured creditors
over the realizable values of related liabilities for which these assets have been pledged.
Statement of affairs

 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 any other unsecured
liabilities. These liabilities include the following: Administrative expenses,
Unpaid employee salaries and other benefits and Taxes and assessments
2. Fully secured creditors – these are liabilities secured by assets with realizable
values equal to or greater than the realizable values of such liabilities.
3. Partially secured creditors – these are liabilities secured by assets with realizable
values less than the realizable values of such liabilities. 
4. Unsecured liabilities without priority – all other liabilities not classifiable under
(1), (2) or (3) above.

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