PA2.

M- 1415
CORPORATE LIQUIDATION

STRAIGHT PROBLEMS

Problem 1
ABC Corp., in financial difficulty, presented the following balance sheet as of June 30, 2012
Cash 13,000 Wages Payable 12,500
Accounts Receivable 120,000 Taxes Payable 17,500
Inventory 150,000 Accounts payable 250,000
Investment in X Stock 30,000 Bank loan payable 40,000
Land and Buildings 250,000 Mortgage payable 300,000
Equipment 125,000 Common Stock 250,000
Other assets 12,000 Retained Earnings (deficit) (17,000
Total assets 700,000 Total liabilities and equity 700,000

Half the receivables are good, but the rest are doubtful and should realize only 25%. The
inventory is currently worth P 125,000. The 1,500 X shares, pledged to secure the bank loan, are
quoted at P30/share. The land and buildings, securing the mortgage, are appraised at 110% of
book value. Equipment has a fair value of P80,000 while the other assets are worthless.

Required:

Prepare a statement of affairs and a deficiency account:

Problem 2

The following information is available on June 1, 2010 to Gold Mine Company, which is having
difficulty in paying its liabilities as they become due:

Carrying Amount
Cash P 8,960
Accounts receivable, net, fair value equal to carrying amount 103,040
Inventories, current fair value, P40,320 pledged
on P47,040 of notes payable 87,360
Machinery and equipment, net, current fair value
of P150,976 pledged on mortgage note payable 239,680
Office supplies, current fair value of P5,600 4,480
Wages payable 12,992
Taxes payable 2,688
Accounts payable 134,400
Notes payable, P47,040 of which is secured by inventories 89,600
Mortgage note payable 112,896
Common stock, P5 par 224,000
Retained earnings, deficit 133,056

Additional information:
a) Estimated liability to the trustee is P58,240.
b) A delivery van previously given to the supervisor was returned to the company, fair market
value, P56,000.

Required:
a. Prepare a statement of affairs as of June 1, 2010.
b. Compute the estimated recoverable amounts to the different types of creditors in the event of
liquidation.
c. Prepare a statement of deficiency to unsecured creditors.

MULTIPLE CHOICE QUESTIONS

1. The Global Corporation is undergoing liquidation and has the following condensed statement
of financial position as of January 1,2013:

Assets Liabilities and SHE

Cash P 114,200 Salaries Payable P 50,000
Receivables (net) 340,800 Accounts Payable 108,500
Inventory 80,000 Mortgage Payable 400,000
Prepaid Expenses 2,500 Loan Payable 220,000
Building (net) 345,000 Note Payable 80,000
Goodwill 55,000 Ordinary shares 120,000
Deficit (41,000)
Total Assets P937.500 Total liab. and SHE P937,500

The mortgage payable is secured by the building having a realizable value of P360,000.
Accounts payable amounting to P60,000 is secured by the receivables amounting to P85,200
which is collectible in the amount of P68,160. The balance in the book value of the receivables
which has a realizable value of P235,000 is used to secure the loan payable. The inventory has a
realizable value of P53,000. In addition to the recorded liabilities are accrued interest on
mortgage payable amounting to P4,000, liquidation expenses amounting to P9,500 and taxes
amounting to 4,000. (use two decimal places for the recovery percentage)

Which of the following statements is wrong?

A. The estimated deficiency to unsecured creditors is P45,640.
B. Payment to partially secured creditors is P392,358
C. Payment to unsecured creditors without priority is P94,499
D. Estimated loss on asset realization is P107,140

2. The following data are provided by Worldwide Corporation which is undergoing liquidation
process:
Total liabilities amounts to P692,000. 35% is fully secured by assets amounting to
P270,000 with fair market value of P250,000; 40% is partially secured by assets
amounting to P300,000 with realizable value of P225,000; and the remaining balance is
unsecured.
Total assets amounts to P890,000 and has a total fair market value P695,000.
 Unpaid income taxes amounts to P35,000. Additional salaries payable and administrative
expenses totaled P28,000.
Deficit amounts to P79,000.

Which of the following statements is correct?

A. Assets available to all unsecured creditors with and without priority is P227,800
B. The amount paid to partially secured creditors is P225,000
C. The estate deficit amount to P60,000
D. The amount paid to all secured creditors is P695,000

3. A review of the assets and liabilities of Atlantis Corporation in bankruptcy on Nov. 30, 2013,
discloses the following:
A mortgage payable of P77,000, is secured by building valued at P14,000 more than its
book value of P68,000
Notes payable of P39,000 is secured by furniture and equipment with book value of
P46,000 that is estimated to be 4/5 realizable
Assets other than those referred to have estimated value of P25,000, an amount that is
P6,000 above its book value
Liabilities other than those referred to total P31,000, which excluded claims with priority
of P8,000

Which of the following statements is true?

A. Actual recovery percentage is P66.27%
B. Total free assets is P22,000
C. Estimated deficiency to unsecured creditors is P11,200
D. Payment to partially secured creditors amount to 36,800

Use the following information for questions 4 to 6:

Twisted Corporation is undergoing liquidation. The trustee of Twisted Corp. presented the
following information: Assets amounting to P125,000 are available to unsecured liabilities
without priority. Assets amounting to P110,000 represents assets originally not pledged to any
liabilities. Unpaid liabilities are as follows: administrative expenses: P21,000; taxes: P18,000 and
wages: P32,000. Accounts payable and notes payable totaled P180,000. No assets were pledged
on the said liabilities. Payment to fully secured creditors and partially secured creditors amounts
to P139,000 and P144,000 respectively. The expected recovery percentage is 40 percent.

4. Amount of assets pledged to fully secured creditors

A. P139,000
B. P225,000
C. P235,000
D. P249,000

5. Total liabilities
A. P522,500
 B. P534,000
C. P613,500
D. P580,000

6. The amount to be paid to all creditors

A. P426,000
B. P187,500
C. P479,000
D. P210,000

7. The following data were taken from the statement of realization and liquidation of
Intercontinental Corporation for the quarter ended June 30, 2013

Assets to be realized P515,625

Supplementary credits 796,875
Liabilities to be liquidated 843,750
Supplementary charges 731,250
Liabilities liquidated 562,500
Assets acquired 562,500
Assets realized 656,250
Liabilities assumed 281,250
Assets not realized 234,375

The ending capital balances of capital stock and retained earnings are P648,750 and P178,500,
respectively. A net loss of P226,500 for the period.

How much is the ending balance of cash?

A. P1,125,000
B. P1,260,000
C. P978,750
D. P807,000