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Chapter 5 Corporate Liquidation & Reorganization

AFST CHAPTER 5

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Jemima Fernandez
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239 views20 pages

Chapter 5 Corporate Liquidation & Reorganization

AFST CHAPTER 5

Uploaded by

Jemima Fernandez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ACCOUNTING FOR SPECIAL

TRANSACTIONS
(Advanced Accounting 1)

LECTURE AID
Chapter 5
Corporate Liquidation and
Reorganization
Learning Objectives
• Describe the accounting for non-
going concern entities.
Equity VS Liability Insolvency

Liability Insolvency
Equity Insolvency
• Liabilities that
• Inability to make in
exceed the fair value
due course
of total assets
• Debt restructuring
• Liquidation
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.
Roles

Trustee
Accountant
a. Continue
-concerned with
operating the
proper Creditor
debtor’s business
reporting of the -outside
if directed by the
financial creditors
court
condition of the appoint a
b. Realizes free trustee to
debtor and
assets of the manage the
adequate
debtor’s estate debtor’s state
accounting and
c. Pay cash to
reporting for
unsecured
the trustee.
creditors
Juridical person financially
distressed may apply for:

1.Court supervised rehabilitation


2.Pre-negotiated rehabilitation
3.An out of court restructuring
agreement
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 -financial condition prepared
for a corporation entering into the stage of
liquidation or bankruptcy.

2. Statement of realization and liquidation - an


activity statement progress toward the liquidation
of a debtor’s state. It shows the actual transactions
that transpired during the period covered
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 (Continuation)
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.
Sample format
Formula to remember

ESTIMATED RECOVERY %, OR DIVIDEND TO GENERAL


UNSECURED CREDITORS : Net free asset/Total unsecured
creditors
Priority of payments
1. Unsecured creditors with priority
2. Fully secured creditors
3. Partially secured creditors (the
secured amount)
4. Unsecured liabilities without priority
Statement of realization and liquidation

Analysis: DR>CR = Net Loss


DR<CR = Net Income
APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM
DISCUSSION
Problem 1

ACCOUNTING FOR SPECIAL


TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
ACCOUNTING FOR SPECIAL
TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
ACCOUNTING FOR SPECIAL
TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
Problem 2

ACCOUNTING FOR SPECIAL


TRANSACTIONS (Advanced
Accounting 1) - (by: MILLAN)
END

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