Corporate Liquidation

CORPORATE LIQUIDATION CORPORATE LIQUIDATION A corporate is considered insolvent when it is unable to pay its debts as they come due, or when its total debts exceed the fair value of its assets. The inability to make payments in due course is referred to as equity insolvency, whereas, having total debts that exceed the fair value of total assets is referred to as bankruptcy insolvency. Debtor Corporation that are insolvent in the equity sense may be able to avoid bankruptcy proceedings by negotiating an agreement directly with creditors which we call debt restructuring, whereas, Debtor Corporation that are insolvent in the bankruptcy sense will ordinarily be reorganized or liquidated under the supervision of a bankruptcy court. STATEMENT OF AFFAIRS An accounting statement that provides relevant information for a liquidating company is referred as the statement of affairs. This statement is a legal document prepared for the bankruptcy court. The accounts’ statement of affairs is a financial statement that emphasizes liquidation values and provides relevant information for the trustee in liquidating the debtor corporation. It also provides information that may be useful to creditors and to the bankruptcy court. A statement of affairs is prepared as of a specific date, and is shows balance sheet information with assets measured at expected net realizable values and classified on the basis of availability for fully secured, partially secured, priority, and unsecured creditors. Liabilities are classified in the statement of affairs as priority, fully secured, partially secured, and unsecured. Historical cost valuations are also included in the statement for reference purposes. EXAMPLE: The following information was taken from the Statement of Affairs file by UNLUCKY Corporation to the bankruptcy court on July 1, 2014. UNLUCKY Corporation Statement of Affairs July 1, 2014 Book value

P200, 000

175, 000

15, 000 10, 000 100, 000 10, 000 60, 000 5, 000

Assets

Realizable ValuesLiability Offsets for Secured Creditors

Pledge for Fully Secured Creditors Land and building – net Less: Mortgage payable Interest payable

P200, 000 5, 000

Pledge for Partially Secured Creditors Accounts receivable Less: Notes payable to bank Interest payable

P120, 000 10, 000

Realizable Values Available for Unsecured Creditor

P220, 000 205, 000

P15, 000

P100, 000 130, 000

Available for Priority and Unsecured Creditors Cash Marketable securities Inventories Prepaid expenses Equipment – net Intangible assets Total available for priority and unsecured Creditors Less: Priority liabilities Total available for unsecured creditors Estimated deficiency

0 15, 000 19, 000 75, 880 ---25, 000 --149, 880 72, 000 77, 880 158, 120 P236, 000

575, 000 Liabilities and Shareholders’ Equity Book Value Claims

Secured and Priority Claims

P 75, 000 15, 000

Priority Liabilities Wages payable Property taxes payable

200, 000 5, 000

Fully Secured Creditors Mortgage payable Interest payable

P 60, 000 12, 000 P 72, 000

200, 000 5, 000 P205, 000

Unsecured Non-priority

120, 000 10, 000

Partially Secured Creditors Notes payable – bank Interest payable Less: Accounts receivable pledge

116, 000 90, 000 200, 000 (255, 000) P575, 000

120, 000 10, 000 P130, 000 100, 000

P30, 000

Unsecured Creditors Accounts payable Notes payable to suppliers

116, 000 90, 000

Stockholders’ Equity Capital stock Retained earnings P236, 000

REQUIRED: 1. Determine the estimated amount payable per peso of unsecured non-priority liability. 2. Show how much each of the creditors would receive after liquidation. STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS This statement shows the beginning balance of cash, the variable sources of cash, example, collections of accounts, sales of assets and refund of prepaid items and also shows the various uses of cash, example the payment of various expenses and liabilities. All disbursements require the approval of the court, so the statement should be a useful financial summary. An example is shown below: UNLUCKY Corporation in Trusteeship Statement of Cash Receipts and Disbursements From JULY1-31, 2014 Cash balance, July 1, 2014 Add: Cash receipts Sale of inventory items Sale of equipment Sale of land and building Collection of receivables Dale of Marketable Securities Total cash receipts Deduct: Cash disbursements Wages payable (priority claim) Property taxes payable (priority claim) Mortgage payable and interest (fully secured) Bank note payable and interest (for secured portion)

P15, 000 P75, 880 25, 000 220, 000 100, 000 19, 000 439, 880 454, 880 P60, 000 12, 000 205, 000 100, 000

Total cash disbursements Cash balance, July 31, 2014

377, 000 P77, 800

STATEMENT OF REALIZATION AND LIQUIDATION This statement is an activity statement that is intended to show progress toward the liquidation of a debtor’s estate. its original purpose is to inform the bankruptcy court and interest creditors of the accomplishments of the trustee. EXAMPLE: Below is a statement of realization and liquidation of HOPELESS MART COMPANY which is under receivership, for the month ended July 31, 2014 HOPELESS MART SALES COMPANY BDO Receiver Statement of Realization and Liquidation For the Month Ended July 31, 2014 Assets Assets to be realized: Marketable securities Accounts receivable Merchandise Assets acquired: Accounts receivable

P16, 000 38, 000 20, 000 10, 000

Assets realized: Marketable securities Accounts receivable Assets not realized: Accounts receivable Merchandise

P12, 000 30, 000 5, 000 15, 000

Liabilities Liabilities liquidated: Accounts payable Liabilities not liquidated: Accounts payable Accrued expenses

28, 000 10, 000 2, 000

Profit and Loss Supplementary charges: Purchases Payment of expenses of Receivership

1, 500 7, 500

Liabilities to be liquidated: Accounts payable Liabilities assumed: Accounts payable

45, 000 8, 000

Supplementary charges: Sales on account Interest on marketable securities Sales for cash

6, 000 2, 000 20, 000

REQUIRED: Determine the net income or loss for the period: ANSWER: ASSETS:

Total Assets to be realized Total assets acquired

P74, 000 10, 000

P84, 000

Total assets realized Total assets not realized

P42, 000 20, 000

62, 000

LIABILITIES: Total liabilities to liquidated Total liabilities assumed

P45, 000 8, 000

53, 000

28, 000 12, 000

40, 000

Total liabilities liquidated Total liabilities not liquidated PROFIT AND LOSS: Supplementary Credits Supplementary Debits

P28, 000 12, 000

22, 000- Loss

13, 000- Gain

16, 000- Gain P7, 000- INCOME

PROBLEMS 1. The following information was taken from the Statement of affairs filed by LIQUIDATED Corporation to the bankruptcy court on July 31, 2014:

LIQUIDATED Corporation Statement of Affairs July 31, 2014 Book value

P750, 000

375, 000

10, 800 150, 000 220, 000 2, 200

1, 508, 000

Assets

Realizable ValuesLiability Offsets for Secured Creditors

Pledge for Fully Secured Creditors Machineries and Equipment – net Less: Mortgage payable P500, 000 Interest payable 50, 000 Pledge for Priority and Secured Creditors Merchandise Inventory Less: Notes payable to bank P 300, 000 Interest payable 30, 000 Available for Priority and Unsecured Creditors Cash Accounts Receivable Land Intangible assets Total available for priority and unsecured Creditors Less: Priority liabilities Total available for unsecured creditors Estimated deficiency

Realizable values Available for Unsecured Creditors

P600, 000 550, 000

P50, 000

P290, 000 330, 000

0 10, 800 91, 200 250, 000 ---402, 000 132, 250 269, 750 145, 250 P415, 000

Liabilities and Shareholders’ Equity Book values Claims P 65, 500 58, 000 8, 750

Secured and Unsecured Priority Claims Non-priority Priority Liabilities Wages payable Property taxes payable Administrative Expenses Payable

500, 000 50, 000

Fully Secured Creditors Mortgage payable Interest payable

300, 000 30, 000

Partially Secured Creditors Notes payable – bank Interest payable Less: Accounts receivable pledge

210, 000 165, 000

P 65, 500 58, 000 8, 750 P 132, 250 500, 000 50, 000 P 80, 000 300, 000 30, 000 P 330, 000 290, 000

Unsecured Creditors Accounts payable Notes payable to suppliers

P40, 000 210, 000 165, 000

Stockholders’ Equity 450, 000 Capital stock (329, 250) Retained earnings P1, 308, 000 1. How much each of the creditors would receive after liquidation? Fully Secured Partially Secured Priority Creditors A. P550, 000 P290, 000 P132, 250 B. 500, 000 316, 000 132, 250 C. 550, 000 316, 000 132, 250 D. 500, 000 290, 000 132, 250

P 415, 000 Non-Priority Creditors P243, 750 263, 500 243, 750 263, 500

The balance sheet of 1680 MARKETING Corporation at August 31, 2014 contains the following items: Assets Cash Accounts receivable – net Inventories Land Building – net Machinery – net Goodwill Equities Accounts payable Wages payable Property taxes payable Mortgage payable Interest on mortgage payable Note payable – unsecured Interest payable – unsecured Capital stock Retained earnings (deficit)

P 400, 000 700, 000 500, 000 300, 000 2, 000, 000 600, 000 500, 000 P 5, 000, 000 P1, 100, 000 600, 000 100, 000 1, 500, 000 150, 000 500, 000 50, 000 2, 000, 000 (1, 000, 000) P 5, 000, 000

The company is in financial difficult and its stockholders and creditors have requested a statement of affairs for planning purposes. The following information is available:  The company estimates that P370, 000 is the maximum amount collectible for the accounts receivable.  Except for 20% of the inventory items that are damaged and worth only P20, 000, the cost of other items is expected to be recovered in full.  The land and building have a combined appraisal value of P1, 700, 000 and are subject to the P1, 500, 000 mortgage and related accrued interest.  The appraised value of the machinery is P120, 000.  Wages payable and property taxes payable are unsecured priority items that do not exceed any limitation of the Bankruptcy Act. 2. How much is the estimated settlement per peso of unsecured liabilities? A. P0. 75 B. P0.40 C. P0.50 D. P0.75

WIRELESS Inc. is undergoing liquidation since January 1, 2014. Its condensed statement of realization and liquidation as of June 30, 2014 show: Supplementary Charges Assets Acquired Liabilities not liquidated Assets Realized Assets to be realized

P415, 200 110, 000 308, 200 620, 000 725, 000

Liabilities Assumed Assets Not Realized Supplementary Credits Liabilities Liquidated Liabilities to be Liquidated

How much is the net income (loss) for the period ending June 30, 2011? A. P72, 450 B. P54, 300 C. P26, 450

P425, 000 192, 000 410, 350 912, 500 850, 000

D. P385, 700

3. The CASHLESS COMPANY has the following: Unsecured creditors P230, 000 Liabilities with priority 110, 000 Secured liabilities: Debt one, P210, 000; value of pledge asset 180, 000 Debt two, P170, 000; value of pledge asset 100, 000 Debt three, P120, 000; value of pledge asset 140, 000 The company also has a number of other assets that are not pledge in any way. The creditors holding debt two want to receive at least P142, 000. For how much do these free assets have to be sold so that debt two would receive exactly P142, 000? A. P138, 000 B. P228, 000 C. P288, 000 D. P258, 000 PAYLESS Corporation filed a petition of bankruptcy on January 2011. On March 15, 2011 the trustee provided the following information about the corporation’s financial affairs. Book values

Estimated Realizable Values

Assets Cash Accounts receivable, net Inventories Plant assets – net Total

P

200, 000 1, 000, 000 1, 500, 000 2, 500, 000 P 5, 200, 000

P 200, 000 750, 000 750, 000 2, 800, 000

Liabilities Liability for priority claims P 500, 000 Accounts payable – unsecured 1, 500, 000 Note payable, secured by accounts receivable 1, 000, 000 Mortgage payable, secured by all plant assets 2, 200, 000 Total P 5, 200, 000 4. Determine the amount expected to be available for unsecured claims. A. P1, 500, 000 B. P900, 000 C. P800, 000 D. P1, 050, 000 5. Determine the expected recovery per peso of unsecured claims. A. P0.60 B. P0.5720 C. P0.70

D. P0.6350

6. The amount of recovery to unsecured accounts payable. A. P855, 000 B. P900, 000 C. P1, 290, 000

D. P600, 000

ENRON Company filed a voluntary bankruptcy petition on July 1, 2011 and the statement of affairs reflects the following amounts:

Assets pledge with fully secure creditors Assets pledge with partially secured creditors Free Assets Liability with priority Fully secured creditors Partially secured creditors Unsecured creditors

BOOK CARRYING VALUE P150, 000 90, 000 210, 000 P 450, 000 Liabilities P35, 000 130, 000 90, 000 270, 000 P 525, 000

ESTIMATED CURRENT VALUE P185, 000 60, 000 160, 000 P 405, 000

3. Determine the amount to be received by partially secured creditors. A. P90, 000 B. P78, 000 C. P60, 000

D. P72, 000

4. Assume that the assets are converted into cash at the estimated current value and the business is liquidated. How much cash will be available to pay the unsecured non-priority claims? A. P240, 000 B. P180, 000 C. P160, 000 D. P125, 000 The information below is related to GREEK Corporation, which is in bankruptcy liquidation as of July 31, 2011: a. Assets which there are no claims amount to P100, 000. b. Unsecured claims of all classes. P150, 000. c. Some of the details of the claims outstanding are as follows:  An unrecorded note for P20, 000 with P600 accrued interest.  Unpaid salaries of employees. P16, 930.  A note amounting to P40, 000 inclusive of P4, 000 interest, secured by P50, 000 receivable, estimated to be 60% collectible.  A P250, 000 note secured by a property with a book value of P250, 000 and market value of P280, 000.  Property taxes and income taxes payable of P30, 000. 5. Compute the estimated payment to partially secured creditors. A. P83, 070 B. P31, 800 C. P34, 600

D. P35, 422

WANTED Corporation filed bankruptcy on July 1, 2011 and some of the information below were taken from its statement of affairs. Estimated Book Value Realizable Value Assets: Assets pledge with fully secured creditors P250, 000 P300, 000 Assets pledge with partially secured creditors 180, 000 120, 000 Liabilities: Fully secured creditors Partially secured creditors Unsecured creditors with priority Unsecured creditors

P280, 000 200, 000 100, 000 400, 000

6. Assumed that the assets are converted to cash at the estimated realizable values, what is the total estimated realizable value of the free assets if the partially secured creditors received P176, 000? A. P436, 000 B. P316, 000 C. P336, 000 D. P416, 000 APFSC - FSC APPSC – PSC Free Assets – Priority Unsecured Creditors Total Deficiency

FSC PSC (120000 + 80000 x .70) PRIORITY UNSECURED (400000 x .70) TOTAL

Assets 20000

Liabilities 80000

316000 336000 144000

400000 480000

Amount Received 280000 176000 100000 280000 836000 – 420000 = 416000

UNLUCKY Corporation has already prepared its statement of affairs and the following data were taken from it: Free assets (fair value P50, 000) P80, 000 Note Payable 1 (secured by assets with Fair value of P75, 000) 65, 000 Note Payable 2 (secured by assets with Fair value of P58, 000) 75, 000 Note Payable 25, 000 Accounts Payable 75, 000 Salaries Payable 4, 000

Taxes Payable

3, 000

7. How much is the estimated deficiency to unsecured creditors? A. P44, 000 B. P34, 000 C. P64, 000 APFSC - FSC APPSC – PSC Free Assets – Priority Unsecured Creditors Total Deficiency

Assets 10000

D. P37, 000

Liabilities 17000

43000 53000 64000

FSC PSC 58000 + (17000 X 53/117) PRIORITY UNSECURED (100000 X 53/117) TOTAL

100000 117000 Amount Received 65000 65701 7000 45299 183000

8. BANCO Co. has been forced into bankruptcy and liquidated. Unsecured claims will be paid at the rate of P0.50 on the peso. CUTE Co. hold a non-interest bearing note receivable from BANCO Co. in the amount of P50, 000 collateralized by machinery with a liquidation value of P10, 000. How much is the total amount to be realized by CUTE Co. on this note receivable? A. P35, 000 B. P30, 000 C. P25, 000 D. P10, 000 10000 + 40000 X .50 = 30000 9. BPI- MALABON holds a P500, 000 note secured by a building owned by LOST software, which has filed for bankruptcy. If the property has a book value of P600, 000 and a fair market value of P450, 000, what is the best way to describe the notes held by BPI- MALABON? The bank has A. A secured claim of P500, 000. B. An unsecured claim of P500, 000. C. A secured claim of P450, 000 and an unsecured claim of P50, 000. D. A secured claim of P50, 000 and an unsecured claim of P50, 000.

10. DEBTOR Inc. owes the CREDITOR Corporation P60, 000 on account, which is secured by accounts receivable with a book value of P50, 000. The unsecured portion is considered a claim under the bankruptcy law, DEBTOR has field for bankruptcy. Its statement of affairs lists the accounts receivable securing the DEBTOR account with an estimated realizable DEBTOR expect to receive? A. P60, 000 B. P58, 000 C. P57, 000 D. P48, 000 The following information is available concerning MONDRAGON Inc., on the date the company entered into bankruptcy proceedings: ACCOUNT Cash Accounts Receivable Merchandise Inventory Prepaid Expenses Building, net Equipment, net Goodwill Wages Payable Taxes Payable Accounts Payable Notes Payable Ordinary Shares Deficit

Balance per Books P2, 860 52, 260 28, 000 430 59, 000 5, 600 5, 650 2, 500 1, 810 79, 000 15, 150 72, 000 16, 660

Inventories with book value of P28, 000 is a security for notes of P10, 300. The other notes are secured by the equipment. Expected realizable values of the assets are: Accounts Receivable P44, 000 Building, net P22, 000 Inventory 18, 500 Equipment, net 2, 000 11. What is the estimated deficiency to unsecured creditors?

A. P79, 000

B. P65, 500

C. 72, 500

D. P9,100

The following data were taken from statement of affairs of GOOD EARTH Co: Unsecured liabilities with priority Shareholder’s Equity Estimated Liquidation Expenses Unsecured liabilities without priority Loss on realization of assets 12. How much is the total free assets? A. P1, 059, 625 B. P937, 125

P122, 500 441, 000 55, 125 1, 102, 500 551, 250

C. P992, 250

D. P953, 375

The following data were taken from the records of LIQUIDATED Co. who is in the process or Liquidation: Shareholder’s Equity per book Ordinary Shares Deficit Estimated gain on realization of land and building Estimated loss on realization of assets: Accounts Receivable Inventories Prepaid Rent Equipment Goodwill Estimated claims requiring settlement: Liquidation Expenses Contingent Liabilities

P350, 000 54, 250 78, 750 23, 100 84, 000 2, 100 170, 000 57, 500 17, 500 26, 250

13. What is the estimated deficiency to unsecured creditors? A. P75, 950 B. P7, 350 C. P5, 950

D. P81, 550

A trustee has appointed by SEC for SORRY Company which is being liquidated. The following transactions occurred after the assets were transferred to the trustee:  Sales on account by the trustee were P75, 000; cost of goods sold were P60, 000 consisting of all inventory transferred from SORRY.  The trustee sold at P12, 000 of marketable securities for P10, 500.  Receivables collected by the trustee; Old- P21, 000 of the P38, 000 transferred; new- P47, 000.  Recorded P16, 000 depreciation on the plant assets of P96, 000 transferred from SORRY.  Disbursements by the trustee; Old current payable- P22, 000 of the P48, 000 transferred; Trustee’s Expenses- P4, 300. In the statement of realization and liquidation: 14. How much are the total assets to realized? A. P168, 000 B. P140, 000 C. P218, 000 D. P206, 000 15. How much is the proceeds from the total assets realized? A. P132, 500 B. P150, 500 C. P153, 500

D. P143, 000

16. How much is the net gain (loss) from realization? A. P (8, 600) B. P(11, 100) C. P(2, 200)

D. P(6, 800)

17. A receiver is appointed for X-MEN 3 Corporation July 1, at which time the following trial balance was prepared from the general ledger: Trial Balance Cash Notes receivable Accounts receivable Merchandise inventory Investments, cost Plant and equipment Accumulated depreciation Notes payable Accounts payable

P 33, 000 57, 000 219, 000 145, 500 30, 000 520, 000 P 85, 000 105, 000 480, 000

Capital stock, par value P20 Retained earnings

150, 000 184, 500 P 1, 004, 500 P 1, 004, 500

Additional data: a. Accrued expenses not recorded as of this date, amount to P10, 050 of which P3, 300 is for property taxes and P3, 600 is for wages for the past month. b. The investments have a market value of P34, 500 and have been pledge as collateral on a note for P30, 000. c. Accounts receivable of P90, 000 have been assigned as security for the remainder of the notes payable. d. It is estimated that 95% of the note receivable, 95% of the assigned accounts receivables and 75% of the remaining accounts receivable will be collected. e. A quick sale of the inventory will realize P90, 000 and of the plant, P165, 000. The corporation also owns a patent not recorded on the books which is expected to realize P6, 000. How much is the estimated deficiency to unsecured creditors? A. P30, 150 B. P25, 300 C. P28, 000 D. P32, 900

END