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School of Accountancy,Business and Hospitality
Accounting for Special Transaction
Departmental Quiz: Corporate Liquidation Part 1: Modified True or False (20 pts) Instruction: Determine whether the statements below is correct or wrong. If it is correct write TRUE,otherwise underline the word/s that makes the statement wrong and write the word to make the statement correct. 1. When the accounting equation of a corporation computes a positive ownership position,the firm is said to be insolvent. NEGATIVE/SOLVENT 2. A bankruptcy petition filed by a firm’s creditors is called voluntary liquidation. INVOLUNTARY 3. A Statement of Affairs is a report designed to show an estimated amount that would be received by each class of creditor’s claims in the event of liquidation. TRUE 4. When a secured claim is not fully settled by the selling of the underlying collateral, the remaining portion is classified as an unsecured liabilities with priority. WITHOUT 5. The final settlement with unsecured creditors is computed by dividing net free assets by total unsecured creditor claims. ESTIMATED RECOVERY PERCENTAGE 6. The accounting statement of affairs is prepared at the beginning of the liquidation process. 7. Statement of affairs shows the results of the trustee's fiduciary actions beginning at the point the trustee accepts the debtor's assets. REALIZATION AND LIQUIDATION 8. New obligations incurred by the trustee is to be reported in the supplementary items section of a statement of realization and liquidation. TRUE/ LIABITIES 9. Estate Deficit may result from the difference between the realizable value of assets and liabilities. ESTIMATED DEFICIENCY/BOOK VALUE 10. Unusual revenue items are reported under supplementary items section of the statement of realization and liquidation.
Part 2: Problem Solving. Write your solution in a separate yellow sheet of paper. Label your solution properly. Encircle your final answer for each requirement. Problem 1: Orville Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The carrying values and estimated fair values of the assets of Orville Company are as follows:
Carrying Value Fair Value
Cash 20,000 20,000 Accounts Receivable 45,000 30,000 Inventory 60,000 35,000 Land 75,000 70,000 Building 180,000 100,000 Equipment 170,000 80,000 Total 550,000 335,000
Debts of Orville are as follows:
Accounts payable 60,000
Wages payable (all have priority) 10,000 Taxes payable 10,000 Notes payable (secured by receivables and inventory) 120,000 Interest on notes payable 6,000 Bonds payable (secured by land and building ) 150,000 Interest on Bonds payable 7,000 Requirements: 1. Compute for the total amount of estimated deficiency (2pts) 2. Compute for the amount of net free assets (2pts) 3. Compute for the amount of estimated recovery percentage (2pts) 4. Compute for the amount estimated to be paid to partially secured creditors (3pts) Answers: Advance accounting Baker
Problem 2: Wilbur Corporation is to be liquidated due to financial difficulty it is facing. The balance sheet on December 31, 2023, is as follows: Assets Cash 4,000 Marketable Securities 20,000 Accounts Receivable 75,000 Inventory 90,000 Prepaid Insurance 6,000 Land 50,000 School of Accountancy,Business and Hospitality Accounting for Special Transaction Departmental Quiz: Corporate Liquidation Plant and Equipment 250,000 Franchises 48,000 Total 543,000
Liabilities and Equity
Accounts Payable 120,000 Wages payable 13,000 Taxes payable 20,000 Interest payable 25,000 Notes Payable 125,000 Mortgages payable 150,000 Common Stock 180,000 Retained Earnings (90,000) Total 543,000 The following additional information is available: 1. Marketable securities consist of 2,000 shares of Bristol Inc. common stock. The market value per share of the stock is 8. The stock was pledged against a 20,000, 8 percent note payable that has accrued interest of 800. 2. Accounts receivable of 40,000 are collateral for a 35,000, 10 percent note payable that has accrued interest of 3,500. 3. Inventory with a book value of $35,000 and a current value of 32,000 is pledged against accounts payable of $60,000. The appraised value of the remainder of the inventory is 50,000. 4. Only $1,000 will be recovered from prepaid insurance. 5. Land is appraised at 65,000 and plant and equipment at 160,000. 6. It is estimated that the franchises can be sold for 15,000. 7. All the wages payable qualify for priority. 8. The mortgages are on the land and on a building with a book value of 110,000 and an appraised value of 100,000. The accrued interest on the mortgages is 7,500. 9. Estimated legal and accounting fees for the liquidation are 10,000. Requirements: 1. Compute for the total amount of estimated deficiency (2 pts) 2. Compute for the amount of net free assets (2pts) 3. Compute for the amount of estimated recovery percentage (2pts) 4. Compute for the amount estimated to be paid to partially secured creditors (3pts) Answer: Advance Accounting by Baker Problem 3: The Liquid Company had a very unstable financial condition caused by a deficiency of liquid assets. On February 4, 20x8, the following information was available:
CASH 112,000 Assets not realized: Accounts Receivable 80,000 Inventory 160,000 Inestment in common stock 26,400 Land 100,000 Building 60,000 Machinery & Equipment 48,000 Liabilities not liquidated: Notes payable 244,000 Accounts payable 288,000 Salaries and Wages 40,000 Taxes 8,000 Bank Loan 180,000
During the six-month period ending July 31, 20x8, the trustee sold the Investment in Common Stock for P26,000, realized P84,000 for the accounts receivable, sold the merchandise for P152,000, and paid-off P26,000 of the bank loan and all liabilities with priorities (salaries, and wages payable, taxes payable) as well as P7,440 for estate administration expenses. Requirement: 1. Determine the estate deficit for the as of February 4,20x8. (2 pts) 2. Determine the net gain or loss in realization and liquidation. (3pts) Answer: RESA Part 3: Short Essay (4pts) School of Accountancy,Business and Hospitality Accounting for Special Transaction Departmental Quiz: Corporate Liquidation Question: What is the importance of preparing a statement of affairs?
