Corporate Liquidation

4 Types of Creditors
1. FULLY SECURED
-100% full amount of the debt is collectible
-FMV of Asset > Liability

2. PARTIALLY SECURED
-FMV of Assets < Liability

3. UNSECURED W/ PRIORITY
a. Liquidation Expenses To be paid by the Free Assets in order of priority
b. Salaries if free assets is less than unsecured w/
c. Taxes priority

4. UNSECURED W/O PRIORITY

-no asset assigned
- cannot be paid 100%, only to the extent of the estimated recovery
percentage

FREE ASSETS
-No liability assigned
-excess assets from fully secured liability

4 Column Analysis

ASSET LIABILITY FREE ASSET USL W/O PRIORITY

XXX > XXX XXX

XXX < XXX XXX
No assigned Liability XXX

No Asset pledge XXX

TOTAL FA TOTAL USL W/O P

*Asset = SILENT= INCLUDE INTEREST

*Liability = SILENT= INCLUDE INTEREST

Free assets xxx

Less: USL w/ Priority (xx) Est. Recovery % = Net Free Assets
Net Free Assets xxx USL w/o Priority
Less: USL w/o Priority (xx)
Estimated Deficiency (XX)

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 Discussion Problem
A bankrupt entity has undergone corporate liquidation. Presented below is its statement of
financial position before the start of liquidation:
Cash P 300,000 Accounts Payable P 100,000
Machinery 500,000 Salaries Payable 200,000
Building 1,200,000 Income tax Payable 300,000
Loans Payable 400,000
Mortgage payable 500,000
Contributed capital 800,000
Deficit (300,000)
The following additional data are provided:
 Liquidation expenses amounting to P600,000 were PAID.
 The loans payable is secured by the machinery which has fair value of P300,000.
 The mortgage payable is secured by the building with a fair value of P1,380,000.
 At the end of liquidation, the holder of loans payable received P340,000.

4 Column Analysis

ASSET LIABILITY FREE ASSET USL W/O PRIORITY

1,380,000 > 500,000 880,000

300,000 < 400,000 100,000
300,000 300,000

100,000 100,000
(600,000) (600,000)
580,000 200,000

Free assets 580,000

Less: USL w/ Priority (500,000) Est. Recovery % = 80,000
Net Free Assets 80,000 200,000
Less: USL w/o Priority (200,000) = 40% (1)
Estimated Deficiency (120,000)

2. Amount received by holder of accounts payable (P100,000 x 40%) P 40,000

3. NFA = P 80,000

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 Statement of Realization & Liquidation
Assets to be Realized Assets Realized
(Noncash Assets, Beginning Balance) (PPE- net proceeds
A/R- Collection
Inv.- Cost of sales)
Increase in Assets Assets not Realized
(Accounts Receivable and Interest (Noncash Assets, Ending Balance)
Receivable during the period)
Liabilities Liquidated Liabilities to be Liquidated
(Liabilities Paid) (Liabilities, Beginning Balance)
Liabilities not Liquidated Increase in Liabilities
(Liabilities, Ending Balance) (Accrued Expenses and Accrued Payable
during the period)

Supplementary Debits Supplementary Credits

(Cost of sales and Accrued (Sales and Accrued Interest
Expenses during the period) Income during the period)

TOTAL DEBITS TOTAL CREDITS

ANALYSIS!
DR > CR = NET LOSS
DR < CR = NET GAIN

Estate Equity, Beg. xxxx Estate Equity, End xx(xx)

Gain/ (Loss) xx(xx) Liability, End xxxx
Estate Equity, End xx(xx) Asset, End xxxx
Asset Not Realized (xxx)
Cash Balance, End xxx

Discussion Problem
Chase Corporation provided the following balances in July 1,2020:
Cash P 5,500 Accounts Payable P 59,500
Accounts Receivable 35,000 Wages Payable 25,000
Inventories 60,000 Tax Payable 35,000
Notes Receivable 78,000 Note Payable 65,000
Equipment 256,000 Mortgage payable 175,000
Share Capital 120,000
Deficit (45,000)
Total 434,500 434,500

In the statement of realization and liquidation, the following data are ascertained for the month
of July:

 The note payable and mortgage payable together with their respective interest are paid.
 Only 7/8 is collected from the existing accounts receivable at the beginning of the month.
 Half of the inventories were sold for P45,000. Beginning balance - considered collected & included in
sup. debit ; Sales - sup. credit
 Only P68,500 of the note receivable is collected. Balances are written-off, not included in T-
 Equipment is sold for P225,000. account.
 Administrative expenses of P13,800 are paid.
 Additional credit sales amounting to P10,500 are made for the remaining inventories.
 Interest not accrued for the month are note receivable P1,500, note payable P5,500, and
mortgage payable P10,500. not received in the beg. of the month, so
included in assets not realized (yet), and
liabilities not liquidated (yet) as well as sup.
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  All existing noncash assets at the beginning of the month are sold or collected during the
month.

1. How much is the profit or loss in the statement of realization and liquidation?

Statement of Realization & Liquidation

429,000 30,625+30,000+68,500+225,000+30,000
10,500+1,500 10,500+1,500

256,000 359,500
119,500 16,000

16,000+30,000+13,800+30,000 45,000+10,500+1,500

906,300 828,625

906,300 > 828,675 = 77,675 NL

2. How much is the estate equity at July 31,2020?

Estate Equity, Beg. 75,000 Share Capital - Deficit

Gain/ (Loss) (77,675)
Estate Equity, End (2,675)

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