Page 1 of 3 | AFAR 02

Corporate Liquidation
MARK ALYSON B. NGINA, CPA, CMA

CORPORATE LIQUIDATION
MARK ALYSON B. NGINA, CPA CMA

Insolvency
The financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course
of business or has liabilities that are greater than its or his assets.

Corporate Liquidation
Liquidation is the termination of business operations or the winding up of the affairs. It is a process by which:
1. Noncash assets are converted to cash (i.e. realization)

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2. Liabilities of the business are settled (i.e. liquidation)
3. Any remaining amount is distributed to shareholders

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Financial Reports
1. Statement of Affairs

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2. Statement of Realization and Liquidation
3. Statement of Receipts and Disbursement

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EXERCISE 1
The following data are provided by the Troubled Company:
Assets at book value
e₱3,000,000
Assets at net realizable value 2,100,000
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Liabilities at book value:
Fully secured mortgage 1,200,000
Unsecured accounts and notes payable 1,400,000
Unrecorded liabilities:
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Interest on bank notes 10,000

Estimated cost of administering estate 120,000
The court has appointed a Trustee to liquidate the company.
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Questions:
1. When the Trustee records the assets and liabilities, it should include an estate deficit of
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2. The statement of affairs prepared by the trustee at this time should include an estimated deficiency to unsecured
creditors of:

EXERCISE 2
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Because of inability to pay its debts, the Liit Kita Manufacturing Company has been forced into bankruptcy as of April 30.
The statement of financial position on that date shows:
Assets Liabilities
Cash ₱ 2,700 Accounts payable ₱ 52,500
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Accounts receivables 39,350 Note payable - PNB 15,000

Notes receivables 18,500 Notes payable - suppliers 51,250
Inventories 87,850 Accrued wages 1,850
Prepaid expenses 950 Accrued taxes 4,650
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Land and buildings 61,250 Mortgage bonds payable 90,000

Equipment 48,800 Common stock – ₱100 par 75,000
- Retained earnings ( 30,850)
₱ 259,400 ₱ 259,400
Additional information:
a. Account receivable of ₱16,110 and notes receivable of ₱12,500 are expected to be collectible. The good notes are
pledged to Philippine National Bank.
b. Inventories are expected to bring in ₱45,100 when sold under bankruptcy conditions.
c. Land and buildings have an appraised value of ₱95,000. They serve as security on the bonds.
d. The current value of the equipment, net of disposal cost is ₱9,000.
e. Estimated legal and accounting fees for the liquidation are ₱1,000.
f. Unrecorded interest on notes payable to supplier amounts to ₱500.
Required: Using the above data, compute for the following:

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 Page 2 of 3 | AFAR 02

MARK ALYSON B. NGINA, CPA, CMA

CORPORATE LIQUIDATION

1. Total free asset 13. Loss on asset realization

2. Net free asset 14. Net loss on asset realization
3. Fully secured creditors 15. Net loss on R&L
4. Partially secured creditors 16. Estate deficit
5. USC with priority 17. Deficiency to USC w/o priority
6. USC without priority 18. Amount paid to FSC
7. %R of FSC 19. Amount paid to PSC
8. %R of PSC 20. Amount paid to USC with priority
9. %R of USC with priority 21. Amount paid to USC without priority
10. %R of USC without priority 22. Total estimated payment to creditors
11. %R of shareholders 23. Total payment to unsecured
12. Gain on asset realization creditors

EXERCISE 3
A trustee has been appointed for Restructured Company, which is being liquidated. The following transactions occurred

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after the assets were transferred to the trustee:

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1. Credit sales by the trustee were ₱100,000. Cost of goods sold were ₱72,000, consisting of all the inventory
transferred from Restructured.
2. The trustee sold all ₱20,000 worth of marketable securities for ₱15,000.

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3. Receivables collected by the trustee:
Old: ₱28,000 of the ₱50,000 transferred
New: ₱65,000

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4. Disbursements by the trustee:
Old current payables: ₱31,000 of the ₱65,000 transferred
Trustee's expenses: ₱6,000
5. Recorded ₱24,000 depreciation on the plant assets of ₱120,000 transferred from Restructured.
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Required:
Prepare a statement of realization and liquidation.
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Solution:
Restructured Company
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Statement of Realization and Liquidation

Assets
Assets to be Realized Assets Realized
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Old Receivables, net ₱ 50,000 Old Receivables ₱ 28,000

Marketable Securities 20,000 New Receivables 65,000
Old Inventory 72,000 Marketable Securities 15,000
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Depreciable Assets, net 120,000 Sales of Inventory 100,000

Assets Acquired Assets Not Realized

New Receivables 100,000 Old Receivables, net 22,000
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New Receivables, net 35,000

Depreciable Assets 96,000

Supplementary Items
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Supplementary Charges Supplementary Credits

Trustee’s Fee 6,000 Net Loss 7,000

Liabilities
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Liabilities Liquidated Liabilities to be Liquidated

Old Current Payables 31,000 Old Current Payables 65,000

Liabilities Not Liquidated Liabilities Incurred

Old Current Payables 34,000 .
₱433,000 ₱433,000

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 Page 3 of 3 | AFAR 02

MARK ALYSON B. NGINA, CPA, CMA

CORPORATE LIQUIDATION

EXERCISE 4
The following data were taken from the statement of realization and liquidation of Bagsak Corporation for the three-month
period ended December 31:
Assets to be realized ₱ 110,000 Liabilities assumed ₱ 60,000
Assets acquired 120,000 Liabilities liquidated 120,000
Assets realized 140,000 Liabilities not liquidated 150,000
Assets not realized 50,000 Supplementary credits 170,000
Liabilities to be liquidated 180,000 Supplementary charges 156,000
What is the net income (loss) for the period?

EXERCISE 5
The Statement of Realization and Liquidation for Goes Out Corporation is as follows:
Assets to be realized ₱720,000 Liabilities assumed ₱ 600,000
Assets acquired 480,000 Liabilities not liquidated 780,000
Assets realized 660,000 Supplementary credits 1,320,000

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Liabilities to be liquidated 960,000 Supplementary debits 1,260,000
Liabilities liquidated 840,000

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Retained earnings decreased by ₱144,000. The ending balances of common stock and retained earnings are ₱1,200,000
and (₱900,000), respectively.

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Questions:
1. The beginning balance of cash is
2. The ending balance of cash is

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"We can achieve anything in life - the only limiting factors are in our own thoughts"
“Let your fear instruct and prepare you. Don’t let it stop you.
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Move confidently ahead and live with all the fullness that life can offer.”
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 -- END OF HANDOUT -- 
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REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 [email protected] MAY 2021 CPA REVIEW SEASON