CHAPTER 5 Corporate Liquidation and Reorganization

PROBLEM 5

Requirement A

Assets pledged to fully secured Available for unsecured

creditors: creditors
Land 1,300,000
Loan payable (750,000) 550,000

Assets pledged to partially secured creditors:

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

Free assets:
Cash 200,000
Accounts receivable 450,000 750,000
Total free assets 1,200,000
Unsecured liabilities with priority: (980,000)
Net free assets 220,000

Requirement B

Unsecured liabilities with priority: Unsecured liabilities without priority

Administrative expenses 180,000
Salaries payable 800,000
Total unsecured liabilities with priority 980,000

Fully secured creditors:

Loan payable 750,000

Partially secured creditors:

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

Unsecured liabilities without priority:

Accounts payable 700,000
Total unsecured liabilities without priority 1,050,000
Requirement C

Total realizable value of assets 2,100,000

Less: Unsecured liabilities with priority

Salaries (800,000)
Administrative expenses (180,000) (980,000)

Less: Fully secured liabilities

Loan payable (750,000)

Less: Secured portion of partially secured

Liabilities
Notes payable (fair value of equipment) (150,000)

Excess available to unsecured liabilities without

220,000
priority (Net free assets)

Less: Unsecured liabilities without priority

Notes payable - excess over fair value of
equipment (500K - 150K) (350,000)
Accounts payable (700,000)

Estimated deficiency to unsecured non-priority

creditors (830,000)

Requirement D

Estimated recovery percentage of unsecured creditors without priority

= 220,000 / 1,050,000
= 20.95 %

Requirement E

Mr. A can expect P 104,750 to collect from Bye-bye Corporation

*500,000 x 20.95 % = 104,750

Requirement F

BYE-BYE CORPORATION
STATEMENT OF AFFAIRS
AS OF JANUARY 1, 20X1
Available for
Realizable unsecured
Book values ASSETS 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 (see below) (980,000)
Net free assets 220,000
Estimated deficiency (squeeze) 830,000
2,300,000 Totals 1,050,000

Unsecured
Realizable non-priority
Book values LIABILITIES 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

2.
Requirement A
I. Opening journal entry

Jan. 1
20x1 Cash 200,000
Accounts receivable 500,000
Equipment, net 600,000
Land 1,000,000
Estate deficit 450,000
Accounts payable 700,000
Salaries payable 800,000
Note payable 500,000
Loan payable 750,000

II. “new” assets and liabilities

Jan.1
20x1 Estate deficit - new 30,000
Interest payable - new 30,000

III. Transactions during 20x1

Cash 280,000
a. Estate deficit 120,000
Accounts Receivable 440,000

Cash 150,000
b. Estate deficit 450,000
Equipment 600,000

Note payable 500,000

Cash 150,000
Estate deficit 350,000

Cash 1,400,000
c. Land 1,000,000
Estate deficit 400,000

Loan payable 750,000

Interest payable 30,000
Cash 780,000

Accounts payable (1/2 of 700k) 350,000

d. Salaries payable (1/4 of 800k) 200,000
Cash 550,000

Estate deficit 240,000

e. Cash 240,000
 Requirement B

BYE-BYE CORPORATION in receivership

STATEMENT OF REALIZATION AND LIQUIDATION
For the year ended December 31, 20x1
ASSETS
Assets to be
realized: Assets realized:
Accounts receivable 500,000 Accounts receivable 280,000
Equipment, net 600,00 Equipment, net 150,000
Land 1,000,000 Land 1,400,000
Total 2,100,000 Total 1,830,000

Assets not
Assets acquired: realized:

- - - -

LIABILITIES
Liabilities Liabilities to be
liquidated: liquidated:
Accounts payable 350,000 Accounts payable 700,000
Salaries payable 200,000 Salaries payable 800,000
Note payable 150,000 Note payable 500,000
Interest payable 30,000 Loan payable 750,000
Loan payable 750,000
Total 1,480,000 Total 2,750,000

Liabilities not Liabilities

liquidated: assumed:

Accounts payable 350,000 Interest payable 30,000

Salaries payable 600,000

Total 950,000

Supplementary Items
Supplementary Supplmentary
expenses Income:
Administrative
expenses 240,000 -
Net loss during the
period 60,000
4,770,000 4,770,000
 Requirement C

Cash
Beginning balance 200,000

Assets realized 1,830,000 1,480,000 Liabilities liquidated

240,000 Administrative expenses

310,000

Requirement D

Estate deficit
1/1/x1 opening bal. 450,000

1/1/x1 new liability 30,000 20,000 1/1/x1 new asset

a. 120,000 350,000 b.

b. 450,000 400,000 c.

e. 240,000
540,000 - end deficit (debit balance)

ASSETS = LIABILITIES + EQUITY

Cash 310,000 Liabilities not liquidated 950,000
Assets not realized 100,000 Estate deficit (540,000)

Total 410,000 Total 410,000