San Sebastian College-Recoletos Canlubang Campus ACCOUNTING ACCOUNTING REVIEW/ REVIEW/ SEMINAR SEMINAR PART I ADVANCED FINANCIAL ACCOUNTING AND REPORTING CORPORATE LIQUIDATION
CORPORATE LIQUIDATION LECTURE NOTES
Business failures take many forms, common one is the inability to settle financial obligations as they become due. If the distressed company liquidates, it enters into bankruptcy procedures that are court administered because of legal ramifications. The process of corporate liquidation would include realization of assets and the distribution of the cash proceeds, first to the different creditors, then the balance to stockholders, if any. Generally, the cash provided would be less than the amount of al l the liabilit ies so a payment deficiency to creditors would occur. These activities are done by a court-appointed trustee under accountability techniques. Actual liquidation, however, is preceded by a court-petition for bankruptcy, voluntary, if filed by the distressed company itself; involuntary if initiated by its creditors. The voluntary petition is submitted to the courts for resolution and a statement exhibiting the petitioner’s debts and assets (at fair values) accompanies the petition. This statement is commonly called the Statement of Affairs. The Statement of Affairs. It is prepared under a quitti ng-concern assumption and makes the following classifications as to assets and liabilities: Assets:
(1) Pledged with Fully Secured Creditors – estimated cash proceeds is equal to or more than the amount of the secured claim. (2) Pledged with Partially Secured Creditors – estimated cash proceeds is less than the amount of the secured claim. (3) Free Asset – any asset of the entity that has not been used to secure the payment of any of the company’s liabilities liabilities and therefore any cash proceeds therefrom is available to unsecured creditors. Liabilities
(1) Secured Liabilities – that which is covered by a collateral asset (a) Fully-secured – the realizable value of the pledged asset is at least equal to the amount of the claim. (b) Partially-secured liabilities – the realizable value of the pledged asset is less than the amount of the claim. Every partially secured claim has a secured portion, which is covered by the realizable value of the collateral and an unsecured portion, that which is not covered.
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(2) Unsecured Liabilities – that which is not covered by a pledged asset. (a) Unsecured liabilities with priority – those that are specified under the Bankruptcy Law that must be paid in full ahead of any other type of unsecured liabilities. (b) Unsecured liabilities without priority – is any other type of unsecured liability. Unrecorded assets with market values are included in the statement of affairs under free assets category and are called contingent assets; unrecorded administrative and liquidation expenses are categorized as unsecured with priority, and are called contingent liabilities. The statement of affairs measures in estimated terms what payments are to be received by the different types of creditors in the event of liquidation. Accounting and Reporting by the Trustee. Accounting would be by simple financial records and reports detailing accountability for the custody of assets and temporary assumption of liabilities. Assets and liabilities taken over are recorded in the trustee’s books at carrying values in the books of the distressed company upon the transfer. Since the stockholders’ equity items are not transferred, a reciprocal account, Estate Equity, is established in the books of the trustee to balance the accounts. In turn, a reciprocal Trustee Account is established in the books of the distressed company in representation of the net assets transferred out to the responsibility of the trustee. 1.
The trustee is required to prepare the following periodic statements and reports: (a) Cash receipts and disbursements statement, (b) a Statement of Estate Equity; and (c) supporting exhibits of assets still undisposed and liabilities not yet liquidated as at the end of the reporting period (balance sheet). The Statement of Realization and Liquidation which is actual-transaction based has lost utility value, and popularity, and thus will be il lustrated only briefly.
PROBLEM SOLVING Rauh Welt Corporation had the following statement of financial position: Cash
5,000
Note Payable short term
97,000
Marketable Securities
30,000
Accounts payable
85,000
Accounts Receivable
25,000
Accrued Expenses
18,000
Inventory
51,000
Note Payable (long term)
208,000
Prepaid Expenses
3,000
Share Capital
95,000
Land
120,000
Retained Earnings
(59,000)
Building
105,000
Equipment
95,000
Intangible assets
10,000
The note payable (short term) is secured by the inventory and the note payable (long term) is secured by the land and building
Marketable securities have a fair value of P35,000 and dividends of P1,000 are due from this investment
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Only 15,000 can be collected from t he accounts receivable
Inventory can be only sold at P48,500
Prepaid expenses include a refund of P1,000
The intangible assets have no resale value
Fair value of land and building P238,000 and fair value of e quipment P58,000
Administrative expenses of P31,500 are estimated as liquidation expenses
Salaries of P12,000 and payroll taxes of P3,000 are accrued
Interest on the long term note payable of P8,000 has not been accrued
1. How much is the estimated deficiency? a. P38,000
c. P43,000
b. P46,000
d. P47,000
2. What is the estimated recovery percentage? a. 66.30%
c. 65.57%
b. 72.16%
d. 67.79%
3. What is the estimated recovery for partially secured creditors? a. P83,497.60
c. P80,655.50
b. P80,301.45
d. P81,378.15
4. How much is the estimated recovery for unsecured creditors without priority? a.
P63,500
c. P59,655
b. P58,344
d. P57,702
5. What is the amount of net free asset? a. P98,500
c. P87,500
b. P89,500
d. P90,500
The following information was gathered from the books of Begriff Cor poration which is currently undergoing bankruptcy proceedings:
Note Payable of P97,500 is secured by furniture and equipment with a carrying amount of P120,000 that is estimated to be 75% realizable
A mortgage payable of P192,500 is secured by building valued at P35,000 less than the carrying amount of P230,000
Assets not mentioned above have an estimated value of P62,500 an amount that is P15,000 above carrying amount
Total liabilities not mentioned above total P96,000, including claims with priority of P18,500
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1. How much is the estimated loss on asset re alization? a. P65,000
c. P80,000
b. P50,000
d. P60,000
2. How much is the estimated recovery percentage? a. 80.65%
c. 54.71%
b. 56.77%
d. 51.76%
3. How much is the estimated recovery percentage for partially secured creditors? a. 96.67%
c. 98.51%
b. 96.52%
d. 96.29%
Bancarote Inc. is under court supervised liquidation due to its insolvency. The court appointed liquidator has provided the following data after conducting an inventory of Bancarote’s assets and liabilities:
The total assets which are not used as security for any liability amounted to P5M while total unsecured liabilities amounted to P20M.
The total assets which are used as collateral or security for corporate obligations amounted to P10M. ¾ of these assets secure a mortgage payable with a book value of P2M including interest while remainder secure a note payable with book value of P3.5M including interest
Salaries payable amounted to P2M while taxes due to go vernment amounted to P1M.
1. What is the estimated recovery percentage of unsecured creditors without priority? a. 25%
c. 41.67%
b. 37.5%
d. 52.5%
2. Using the same data in number 1, what is the amount received by partially secured creditors? a. P2,750,000
c. P2,916,700
b. P2,875,000
d. P3,025,000
Liberty Corporation provided the following balances in July 1,2017: Cash Accounts Receivable Inventories Notes receivable Equipment
5,500 35,000 60,000 78,000 256,000
Accounts payable Wages payable Tax payable Note payable Mortgage payable Share capital Deficit
59,500 25,000 35,000 65,000 175,000 120,000 (45,000)
Total
434,500
Total
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 interests are paid.
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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 Only 68,500 of the notes receivable is collected Equipment is sold for P225,000 Administrative expenses of P13,800 are paid Additional credit sales amounting to P10,500 are made for the remaining inventories Interests accrued for the month are note receivable of P1,500, note payable P5,500 and mortgage payable P10,500 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? a. (42,475) c. (77,675) b. 27,975 d. 75,175 2. How much is the estate equity at July 31,2017? a. (102,975) c. 150,175 b. 32,525 d. (2,675)
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