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Chapter 5
Corporate Liquidation & Reorganization
PROBLEM 1: TRUE OR FALSE
1. FALSE – see solution below

2. TRUE
Total assets @ realizable value (100
x 90%) 90
Total priority claims
(60)
Net free assets
30
Total non-priority claims (150 - 60)
90
Estimated deficiency recovery 33.33%

3. FALSE (40 asset @ carrying amt. x 90%) = 36

realizable value;
36 realizable value vs. 30 loan = 30 loan is fully secured.

4. TRUE
⮚ (10 asset @ carrying amt. x 90%) = 9 realizable value;
⮚ 9 realizable value vs. 15 note = note is partially
secured;
⮚ 9 secured + (6 unsecured x 1/3 recovery see solution
above) = 11

5. TRUE – shareholders are paid last; if the unsecured

non-priority creditors can only expect to recover 1/3
of their claims, the shareholders will recover nothing.

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. A
3. A
4. D
5. D
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PROBLEM 3: EXERCISE
1. Solutions:

Requirement (a): Statement of affairs

Available
Book Realizabl for
ASSETS
values e values unsecured
creditors
Assets pledged to fully secured creditors:
5,000,00
Land and building 5,200,000
0
(4,000,00
Loan payable
0)
Interest payable (30,000) 1,170,000

Assets pledged to partially secured creditors:

600,00 400,00
Equipment, net -
0 0

Free assets:
80,00 80,00
Cash
0 0
440,00
Accounts receivable 334,400
0
200,00
Note receivable 200,000
0
20,00
Interest receivable
- 0
1,060,00
Inventory 820,000
0
20,00
Prepaid assets - 1,454,400
0
Total free assets 2,624,400
Less: Unsecured
(810,000
liabilities with priority
)
(see below)
Net free assets 1,814,400
Estimated deficiency (squeeze)
(2,592,000 – 1,814,400) 777,600
7,400,00
2,592,000
0

Unsecured
Book LIABILITIES AND Realizabl non-
values EQUITY e values priority
liabilities
Unsecured liabilities with priority:
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Administrative 60,0
- expenses 00
50,00 50,0
0 Accrued salaries 00
700,00 700,00
0 Current tax payable 0
Total unsecured 810,00
liabilities with priority 0 -

Fully secured
creditors:
4,000,00 4,000,00
Loan payable
0 0
30,0
Interest payable
00 -

Partially secured creditors:

600,00
600,000
0 Note payable
Equipment, net (400,000) 200,000

Unsecured creditors
392,00 Accrued expenses, net
392,000
0 of accrued salaries
2,000,00
Accounts payable 2,392,000
0 2,000,000
Total unsecured
2,592,000
creditors

(342,00
- -
0) Shareholders' equity
7,400,00
2,592,000
0

Requirement (b): Estimated deficiency

777,600 (see statement above)

or (Alternative solution)

7,054,40
Total assets at realizable values 0

Total liabilities at settlement (7,832,00

amounts 0)
Estimated deficiency
 Page | 4

(777,60
0)

Requirement (c): Estimated recovery percentage

Net free assets

Estimated recovery
Total unsecured
percentage of unsecured =
liabilities without
creditors without priority
priority

1,814,400 ÷ 2,592,000 = 70%

Requirement (d): Mr. A’s recovery

500,000 x 70% = 350,000

2. Solutions:
Requirement (a):
i. opening journal entry
Jan. Cash 80,000
1,
20x1
Accounts receivable 440,000
Note receivable 200,000
Inventory 1,060,0
Prepaid assets 00
Land 20,000
Building 1,000,0
Equipment 00
Estate deficit (squeeze) 4,000,0
Accrued expenses 00 442,000
Current tax payable 600,000 700,000
Accounts payable 342,000 2,000,0
Note payable 00
Loan payable 600,000
4,000,0
00

ii. journal entry for new assets and liabilities

Jan. Interest receivable 20,000
1,
20x1
Estate deficit 20,000
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Jan. Estate deficit 30,000

1,
20x1
Interest payable 30,000

iii. compound journal entry for the transactions

Jan. Cash 1,486,00
1 to
Jun
Accrued expenses (acc. salaries 0(a)
e only) 50,000
30, Current tax payable 700,000
20x Note payable 600,000
1
Loan payable 4,000,00
Interest payable 0 440,00
Accounts receivable 30,000 0
Note receivable 200,00
Interest receivable 0
Inventory (1.06M x 50%) 20,000
Prepaid assets 530,00
Land 0
Building 20,000
Equipment 1,000,0
Estate deficit (squeeze) 00
4,000,0
00
600,00
0
56,000
(a)
(75% x 440K) + (20K + 180K) + 590K + 5.2M + 440K – 50K –
700K – (4M + 30K) – 440K – 54K = 1,486,000

Requirement (b):
ASSETS
Assets to be realized: Assets realized:
Accounts
440,000 330,000
receivable Accounts receivable
Note receivable 200,000 Note receivable 180,000
1,060,00
Inventory 20,000
0 Interest receivable
Prepaid assets 20,000 Inventory 590,000
5,000,00 5,200,00
Land and building
0 Land and building 0
Equipment, net 600,000 Equipment 440,000
7,320,00 6,760,00
Total 0 Total 0

Assets acquired: Assets not

 Page | 6

realized:
Interest 530,
receivable 20,000 Inventory 000

LIABILITIES
Liabilities liquidated: Liabilities to be liquidated:
Accrued expenses 50,000 Accrued expenses 442,000
Current tax Current tax payable
700,000 700,000
payable
Interest payable Accounts payable 2,000,00
30,000
0
Loan payable 4,000,00 Note payable
600,000
0
Note payable Loan payable 4,000,00
440,000
0
Total 5,220,00 Total 7,742,00
0 0

Liabilities
Liabilities not liquidated: assumed:
Accrued expenses 392,000 Interest payable 30,000
2,000,00
Accounts payable 0
2,392,00
Total 0

SUPPLEMENTARY ITEMS
Supplementary expenses: Supplementary income:
Administrative
54,000
expenses -
Net gain during
the 56,000
period

15,062,00 15,062,0
0 00

Requirement (c):
Cash
Beg. bal. 80,000
Assets 6,760,0 5,220,0
realized 00 00 Liabilities liquidated
Administrative
54,000 expenses
1,566,
000
 Page | 7

Requirement (d):

Estate deficit
342,
opening 000
new 30, 20,
liability 000 000 new asset
56,
000 transactions
29
6,000 end.

ASSETS = LIABILITIES + EQUITY

1,566,0 (squeez Liabilities not 2,392,0 (star
Cash
00 e) liq. 00 t)
Assets not 530,00 (296,00
real. 0 Estate deficit 0)
2,096,00 2,096,0
Total 0 Total 00

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
Cash 100,000
Accounts receivable (600K x 60%) 360,000
Inventory (1.56M x 50%) 780,000
Land and building 2,300,000
Equipment, net (400K - 70K refurbishment) 330,000
Total assets @ realizable values 3,870,000

Accounts payable (a) 1,157,000

Income tax payable (amt. payable on tax
amnesty) 780,000
Note payable 1,000,000
Loan payable 1,200,000
Interest payable (80K + 70K) 150,000
Estimated liquidation costs 120,000
SSS, PhilHealth & Pag-IBIG 160,000
Total liabilities @ expected net settlement
amounts 4,567,000
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Estimated deficiency (697,000)

Accounts payable @ book value

(a)
1,600,000
Discount (23,000)
Waived (420,000)
Accounts payable @ expected
settlement amt. 1,157,000

2. A
Solution:
Cash 100,000
Accounts receivable (600K x 60%) 360,000
Inventory (1.56M x 50%) 780,000
Land and building 2,300,000
Equipment, net (400K - 70K refurbishment) 330,000
Total assets @ realizable values 3,870,000

Income tax payable 780,000

Note & interest (realizable value of equpt.) 330,000
Loan payable 1,200,000
Interest payable on loan 70,000
Estimated liquidation costs 120,000
SSS, PhilHealth & Pag-IBIG 160,000
Total secured & priority claims 2,660,000

Net free assets 1,210,000

3. C
Solution:
Net free assets
Estimated recovery
Total unsecured
percentage of unsecured =
liabilities without
creditors without priority
priority
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= 1,210,000 (see below) ÷ 1,907,000 (see below) =

63.45%

330,000 realizable value of equipment + (750,000

unsecured see below x 63.45%) = 805,875

Available
Book Realizablfor
ASSETS
values e values
unsecured
creditors
Assets pledged to fully secured creditors:
2,000,00
Land and building 2,300,000
0
(1,200,00
Loan payable
0)
Interest payable (70,000) 1,030,000

Assets pledged to partially secured creditors:

400,00 Equipment, net (400K – 330,00
-
0 70K) 0

Free assets:
100,0 100,0
Cash
00 00
600,00 Accts. receivable (600K x
360,000
0 60%)
1,560,00
Inventory (1.56M x 50%) 780,000 1,240,000
0
Total free assets 2,270,000
Less: Unsecured
(1,060,00
liabilities with priority
0)
(see below)
Net free assets 1,210,000
Estimated deficiency (squeeze)
(1,907,000 – 1,210,000) 697,000
4,660,00
1,907,000
0

Unsecured
Expected
Book LIABILITIES AND non-
settleme
values EQUITY priority
nt
liabilities
Unsecured liabilities with priority:
120,
- Liquidation costs 000
- SSS, PhilHealth & Pag- 160,
 Page | 10

IBIG 000
900,00 780,00
0 Income tax payable 0
Total unsecured 1,060,
liabilities with priority 000 -

Fully secured
creditors:
1,200,00 1,200,00
Loan payable
0 0
70,0
- Interest payable
00 -

Partially secured creditors:

1,000,
1,000,000
000 Note payable
- Interest payable 80,000
Equipment, net (330,000) 750,000

Unsecured creditors without

priority:
1,600,00 1,157,000
Accounts payable (a) 1,157,000
0
Total unsecured creditors without
1,907,000
priority

(40,000) Shareholders' equity - -

4,660,00
1,907,000
0

(a)
Accounts payable @ book value 1,600,000
Discount (23,000)
Waived (420,000)
Accounts payable @ expected
settlement amt. 1,157,000

4. D - 80,000 x 63.45% see previous solution = 50,760

5. B
Solution:
Available for
Realizable
unsecured
value
creditors
Assets pledged with fully
secured creditors 190,000
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Fully secured creditors (130,000) 60,000

Free assets 140,000

Total free assets 200,000
Liabilities with priority (20,000)
Net free assets 180,000

Secured and Unsecured

Priority liabilities without
claims priority
Partially secured
100,000
creditors
Assets pledged with
partially secured (60,000)
creditors 40,000

Unsecured creditors 260,000

Total unsecured
liabilities without
priority 300,000

Net free assets 180,000

Divide by: Total unsecured liabilities
300,000
without priority
Recovery percentage 60.00%

Assets pledged with partially secured

creditors 60,000
Partially secured creditors 100,000
Assets pledged with partially secured
creditors (60,000)
Excess to be paid from net free assets 40,000
Multiply by: Recovery percentage 60.00% 24,000
Total amount paid to partially
secured creditors 84,000

6. D
Solution:
Unsecured creditors 260,000
Multiply by: Recovery percentage 60.00%
Amount paid to unsecured creditors 156,000
 Page | 12

7. C
Solution:
Net free assets
Estimated recovery
Total unsecured
percentage of unsecured =
liabilities without
creditors without priority
priority
(a)
65% = Net free assets ÷ 650,000
Net free assets = 422,500
(a)

Supplier Expected net settlement

s amounts
Athena
Co. (600K - 100K) 500,000
80K representing
Riley Co. goods 80,000
Naia Co. (120K - 50K) 70,000
Total 650,000

8. A
Solution:
Assets to be realized
Accounts receivable 600,000
Inventory 900,000
Equipment, net 400,000
Total 1,900,000

Assets acquired -

Assets realized
[(600K x 90%) -
Accounts receivable
108K] 432,000
[(900K x 1/2) x
Inventory
80%] 360,000
Equipment, net (380K - 50K) 330,000
1,122,00
Total Total 0
 Page | 13

Assets not realized

Accounts receivable (600K x 10%) 60,000
Inventory (900K x 1/2) 450,000
Total 510,000

Liabilities to be
liquidated
Accounts payable 1,600,000
Loan payable 1,500,000
Total 3,100,000

Liabilities assumed
Employee termination
benefits 100,000
Total 100,000

Liabilities liquidated
Accounts payable 100,000
Loan payable 1,000,000
Employee termination
benefits 80,000
Total 1,180,000

Liabilities not
liquidated
Accounts payable (1.6M - .1M) 1,500,000
Employee termination
benefits (100K - 80K) 20,000
Total 1,520,000

Supplementary
expenses
Liquidation costs 50,000

Supplementary income
Sale of scrap materials 10,000
 Page | 14

9. C
Solution:
Debit Credit
s s
1,900,0 1,122,0
Assets to be realized Assets realized
00 00
510,00 Assets not
Assets acquired -
0 realized
1,180,0 3,100,0
Liabilities liquidated Liabilities to be liq.
00 00
1,520,0 100,00 Liabilities
Liabilities not liquidated
00 0 assumed
Supplementary
Supplementary expenses 50,000 10,000
inc.
4,650,0 4,842,0
Totals Totals
00 00
Net gain - excess of Cr. 192,00
over Dr. 0

Optional reconciliation:
Gain (Loss)
(108,
A/R (the commission paid) 000)
(90,
Inventory (900K x 50% x 20%) 000)

Equipment (380K - 50K - 400K) (70,000)

Loan (1.5M - 1M) 500,000

Liquidation costs (50,000)

Scrap materials 10,000

Net gain 192,000

10. B
Solution:
Cash
Beg. bal. 100,000
Assets realized 1,122,000 1,180,0 Liabilities
 Page | 15

00 liquidated
Sale of scrap 50,000 Liquidation costs
10,000
2,000
 Page | 16

PROBLEM 5: FOR CLASSROOM DISCUSSION

1. Solutions:

Requirement (a):
Assets pledged to fully secured creditors:
1,300,0
Land 00

Assets pledged to partially secured creditors:

150,00
Equipment - net 0

2,100,00
Total assets at realizable value 0
Less: Secured creditors:
(750,000
Fully secured - Loan payable )
Partially secured - Note payable (up to the RV of (150,000
equipt. only) )
1,200,0
Total free assets 00
Less: Unsecured creditors with priority:
(180,000
Estimated administrative expenses )
(800,000
Salaries payable )
Net free assets 220,000

OR
Excess of the RV of land over loan payable 550,000
Cash 200,000
Accounts receivable 450,000
1,200,00
Total free assets 0
Less: Unsecured liabilities with priority:
Estimated administrative expenses (180,000)
Salaries payable (800,000)
Net free assets 220,000

Requirement (b):

Unsecured liabilities with priority:

Administrative expenses 180,000
 Page | 17

Salaries payable 800,000

980,000
Fully secured creditors:
Loan payable 750,000

Partially secured creditors:

Notes payable 500,000

Unsecured liabilities without priority:

Note payable - excess (500K – 150K RV of equipment) 350,000
Accounts payable 700,000
1,050,00
0

Requirement (c):
Net free assets (see above) 220,000
(1,050,0
Unsecured liabilities without priority (see above) 00)
Deficiency to unsecured non-priority (830,00
creditors 0)

OR
2,100,00
Total assets at realizable value 0
Total liabilities at settlement amt. (2.75M + 180K (2,930,00
adm. Exp.) 0)
Estimated deficiency to unsecured non- (830,00
priority creditors 0)

Requirement (d):

Net free assets

Estimated recovery
Total unsecured
percentage of unsecured =
liabilities without
creditors without priority
priority

= 220,000 ÷ 1,050,000 = 20.95%

Requirement (e):
500,000 x 20.95% = 104,750
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 Page | 19

Requirement (f):
BYE-BYE CORPORATION
STATEMENT OF AFFAIRS
AS OF JANUARY 1, 20X1
Available
Realiza for
Book ble unsecured
values ASSETS values creditors
Assets pledged to fully secured creditors:
1,300,00
1,000,000 Land 0
(750,000
Loan payable ) 550,000

Assets pledged to partially secured creditors:

600,000 Equipment - net 150,000
(500,000
Notes payable ) -

Free assets:
200,000 Cash 200,000
500,000 Accounts receivable 450,000 650,000
Total free assets 1,200,000
Less: Unsecured
liabilities
with priority (see
below) (980,000)
Net free assets 220,000
Estimated deficiency
(squeeze) 830,000
2,300,00
0 Totals 1,050,000

Unsecured
Realiza non-
Book ble priority
values LIABILITIES values liabilities
Unsecured liabilities with priority:
- Administrative expenses 180,000
800,000 Salaries payable 800,000 -

Fully secured
creditors:
750,000 Loan payable 750,000 -

Partially secured
creditors:
500,000 Notes payable 500,000
Equipment - net (150,000 350,000
 Page | 20

Unsecured creditors:
700,000 Accounts payable 700,000 700,000

(450,000) Shareholders' equity - -

2,300,00
0 Totals 1,050,000

2. Solutions:
Requirement (a):
i. opening journal entry
Jan. Cash 200,000
1,
20x1
Accounts receivable 500,000
Equipment – net 600,000
Land 1,000,0
Estate deficit (squeeze) 00
Accounts payable 450,000 700,000
Salaries payable 800,000
Notes payable 500,000
Loan payable 750,000

ii. journal entry for new assets and liabilities

Jan. Estate deficit 30,000
1,
20x1
Interest payable 30,000

iii. journal entries for the transactions

(a) Cash 280,000
Estate deficit 120,000
Accounts receivable 400,000
(b) Cash 150,000
Estate deficit 450,000
Equipment 600,000

Notes payable 500,000

Cash 150,000
Estate deficit 350,000
(c) Cash (1.5M – 100K) 1,400,0
Land 00 1,000,0
Estate deficit 00
400,000
Loan payable
Interest payable 750,000
Cash 30,000
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780,000
 Page | 22

(d) Accounts payable (700K x ½) 350,000

Salaries payable (800K x ¼) 200,000
Cash 550,000
(e) Estate deficit 240,000
Cash 240,000

Requirement (b):
ASSETS
Assets to be realized: Assets realized:
Accounts
500,000 280,000
receivable Accounts receivable
Equipment, net 600,000 Equipment 150,000
1,000,00 1,400,00
Land
0 Land 0
2,100,00 1,830,00
Total 0 Total 0

Assets not
Assets acquired: realized:
100,
- Accounts receivable 000

LIABILITIES
Liabilities liquidated: Liabilities to be liquidated:
Accounts payable 350,000 Accounts payable 700,000
Salaries payable 200,000 Salaries payable 800,000
Note payable 150,000 Note payable 500,000
Loan payable 750,000 Loan payable 750,000
Interest payable 30,000
Total 1,480,00 Total 2,750,00
0 0

Liabilities
Liabilities not liquidated: assumed:
Accounts payable 350,000 Interest payable 30,000
Salaries payable 600,000
Total 950,000

SUPPLEMENTARY ITEMS
Supplementary expenses: Supplementary income:
Liquidation costs 240,000 -
Net loss for the year 60,000

4,770,000 4,770,00
 Page | 23

Requirement (c):
Cash
Beg. bal. 200,000
Assets 1,830,0 1,480,0
realized 00 00 Liabilities liquidated
Administrative
240,000 expenses
310,00
0

OR
Cash
Beg. bal. 200,000
(a) 280,000
(b) 150,000 150,000 (b)
1,400,0
(c) 00 780,000 (c)
550,000 (d)
240,000 (e)
310,00
0

Requirement (d):

Estate deficit
450,
opening 000
new 30,
-
liability 000 new asset

transaction 60,000
s*
540
,000 end.

* From journal entries (a) to (e): 120K + 450K – 350K –

400K + 240K = 60K net debit
 Page | 24

OR
Estate deficit
450,
opening 000
new 30,
liability 000
(a) 120,000
(b) 450,000 350,000 (b)
(e) 240,000 400,000 (c)
540
,000 end.

❖ RECONCILIATION:
ASSETS = LIABILITIES + EQUITY
310,00 (squeez Liabilities not 950,00 (start
Cash
0 e) liq. 0 )
Assets not 100,0 (540,00
real. 00 Estate deficit 0)
410,00 410,00
Total 0 Total 0