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CORPORATE LIQUIDATION & REORGANIZATION most common reason is insolvency (liabilities exceed assets), thereby resulting to financial dificulty in paying off debts. INSOLVENCY ACT OF THE PHILIPPINESA. Voluntary - the insolvent corporation voluntarily applies a petition to a court of law to be disc...

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CORPORATE LIQUIDATION & REORGANIZATION - most common reason is insolvency (liabilities exceed assets), thereby resulting to financial dificulty in paying off debts. INSOLVENCY ACT OF THE PHILIPPINES A. Voluntary - the insolvent corporation voluntarily applies a petition to a court of law to be discharged from its liabilities. B. Involuntary - three or more creditors of the insolvent corporation file a petition to a court of law for the adjudication of the corporation as insolvent. LIQUIDATION- termination of business operations or the winding up affairs. *Non cash assets realized to cash. *Liabilities are paid. *Remaining assets to owners. APPROPRIATE MEASUREMENT ASSETS --> REALIZABLE VALUE (ESTIMATED SELLING PRICE LESS DISPOSABLE COSTS) LIABILITIES --> EXPECTED NET SETTLEMENT FINANCIAL REPORTS 1. STATEMENT OF AFFAIRS 2. STATEMENT OF REALIZATION AND LIQUIDATION *NOTE DISCLOSURES AND SUMMARY OF CASH RECEIPTS & DISBURSEMENTS may also be prepared. STATEMENT OF AFFAIRS (same as Financial Position) ASSETS: 1. Pledged to Fully Secured Creditors - assets with realizable values equal to or greater than the expected net settlement amounts of the related liabilities for which the assets have been pledged as security. The excess is available to unsecured creditors. 2. Pledged to Partially Secured Creditors - assets with realizable values less than the expected net settlement amounts of the related liabilities for which the assets have been pledged as security. The deficiency must come from the proceeds of other assets. 3. Free Assets - not been pledged and includes also excess of pledged to fully secured creditors. LIABILITIES: 1. Unsecured Liabilities with Priority - mandated by law to be paid first. A. Administrative expenses - direct costs B. Salaries and other benefits C. Taxes and assessments 2. Fully Secured Creditors - liabilities secured with sufficient assets. 3. Partially Secured Creditors - liabilities secured with insufficient assets. 4. Unsecured Liabilities without Priority - all other liabilities not classified under (1), (2), and (3) above. STEPS: 1. Restate the assets and liabilities. 2. Identify the classifications of the assets and liabilities. 3. (Optional) Estimated Recovery Percentage (ERP) ERP of Unsecured Creditors without priority = Net Free Assets/Total Unsecured Liabilties w/o Priority STATEMENT OF REALIZATION AND LIQUIDATION - periodic financial report that shows information on the progress of the liquidation process. It is depicted like a T-account. Debits

Credits

*Assets to be realized *Assets acquired *Liabilities Liquidated *Liabilities not liquidated *Supplementary expenses

*Assets realized *Assets not realized *Liabilities to be liquidated *Liabilities assumed *Supplementary income

NOTE: >Excess of Credits over Debits is Net Gain. >Excess of Debits over Credits is Net Loss. *Assets to be realized - represents the total non-cash assets available for disposal as at the beginning of the period. This is measured at book value (carrying amount). *Assets acquired - represents previously unrecorded assets that were recognized during the period. Similar terms are "additional assets" or "new assets". *Assets realized - represents the actual net proceeds from the conversion of non-cash assets into cash during the period. *Assets not realized - the unsold non-cash assets as at the end of the period, measured at book value. *Liabilities to be liquidated - represents the total liabilities to be settled as at the beginning of the period. This is measured at book value. *Liabilities assumed - represents previously unrecorded liabilities that were recognized during the period. Similar terms are "Additional liabilities" or "new liabilities". *Liabilities liquidated - represents the actual net settlement amounts of liabilities paid during the period. *Liabilities not liquidated - unpaid liabilities as at the end of the period, measured at book value. *Supplementary expenses/income - income and expenses realized/incurred during the period. REORGANIZATION - implementation of a business plan to restructure or rehabilitate a corporation with the hopes of increasing company value. Insolvency is one of the reasons of reorganization. Types: 1. Group reorganization - ownership within a group of companies changes. 2. Recapitalization - refers to the change in capital structure through the replacement of old shares with new shares. 3. Quasi-reorganization - revalues its assets and liabilities and realigns its equity. 4. Corporate rehabilitation - administered by another party in order to try to bring back the corporation to its former financial condition. 5. Troubled debt restructuring - involves the settlement of obligation at other than the originally agreed method of settlement. The creditor grants the debtor concession.

STRAIGHT PROBLEMS: The following balances were ascertained in NO MONEY Corp. which is experiencing insolvency: Cash 8,000 Accounts payable 80,000 Note receivable 120,000 Accrued expenses 30,000 Inventories 80,000 Salaries payable 15,000 Prepaid expense 10,000 Mortgage payable 155,000 Equipment, net 150,000 Ordinary shares 100,000 TOTAL 368,000 Deficit (12,000) TOTAL 368,000 Additional information: *Estimated net realizable value of the notes receivable was P105,000 and was pledged to the mortgage payable. *80% of the book value of the inventories can be sold at P45,000 and was pledged to 60% of the accounts payable.

*The remaining book value of the inventories have an estimated fair value of P20,000. *80% of the remaining unpaid accounts payable were secured by the equipment having an estimated fair value of P60,000. *Prepaid expense has no estimated fair value. *Liquidation and administration expenses were estimated in the amount of P8,000. *Income tax payable had been accrued in the amount of P2,000 (the accountant recorded it using the accrued expense account) *Interest on the note receivable and mortgage payable have not been accrued in the amount of P10,000 and P15,000 respectively. Requirements: 1. How much is the estimated deficiency? 55,000 Cash 8,000 Inventories 20,000 Equipment 34,400 Total Free Assets 62,400 Less: UC with Priority 25,000 Net Free Assets P37,400 UC w/o Priority Inc. of UP of PSL 92,400 Deficiency (SHE) Debit balance 55,000 2. How much are the net free assets? 37,400 3. How much is the estimated payment to the mortgage payable? 137,264 Mortgage Payable 155,000 Interest Payable 15,000 170,000 NRV of Note Receivable 105,000 Interest Note Receivable 10,000 (115,000) UP OF PSL (MP + IP) 55,000 UP of PSL (MP + IP) NRV of NR and Interest on NR ADD: RECOVERY FROM UP OF PSC(55K x 40.476)

55,000 115,000 22,261.8 137,264

UNSECURED CREDITS W/O PRIORITY Unsecured AP (80,000 x 40%) x 20% = P6,400 Unsecured AE W/O Priority (30,000-2,000) =28,000 UP of PSL: (MP + IP) =55,000 UP of PSL (AP) =3,000 92,400 UC w/o Priority Inc. of UP of PSL RECOVERY RATE OF UC W/O PRIORITY = 37,400/92,400 = 40.476% 4. How much is the estimated recovery percentage to the partially secured accounts payable? 96.28% UC w/ PRIORITY LIQ. EXP SALARIES PAYABLE ITP UC W/ PRIORITY

FSL SECURED AP (80,000 X 40%) X80% FV OF EQUIPMENT FREE EQUIP

8,000 15,000 2,000 25,000

PSL SECURED AP (80,000 X 60%)

48,000

25,600 60,000 34,400

NRV OF INVENTORY UP OF PSL (AP) NRV OF INVENTORY (3,000 X 40.476%)

45,000 (3,000) 45,000 1214.28 46,214.28/48,000= 96.28%

ABC Co.'s statement of realization and liquidation shows the following: ASSETS: To be realized 2,000,000 Acquired 15,000 Realized 1,180,000 Not realized 220,000 LIABILITIES: Liquidated Not liquidated To be liquidated Assumed

2,130,000 1,190,000 2,870,000 32,000

SUPPLEMENTARY ITEMS: Supplementary expenses 25,000 Supplementary income 18,000 Requirements: 1. How much is the net gain (loss) for the period? Debits Credits *Assets to be realized 2,000,000 *Assets realized *Assets acquired 15,000 *Assets not realized *Liabilities Liquidated 2,130,000 *Liabilities to be liquidated *Liabilities not liquidated 1,190,000 *Liabilities assumed *Supplementary expenses 25,000 *Supplementary income TOTAL 5,360,000 Net Loss- excess of Dr. over Cr.

1,180,000 220,000 2,870,000 32,000 18,000 4,320,000 1,040,000

2. If the estate deficit at the end of the period is P870,000, how much is the ending balance of cash? ASSETS = LIABILITIES + EQUITY Cash (squeeze) 100,000 Liabilities not liquidated 1,190,000 (start from here) Assets not realized 220,000 Estate Deficit (870,000) Total 320,000 Total 320,000

MULTIPLE CHOICE (THEORIES): 1. It refers to the extinguishment of the juridical personality of a corporation for causes expressly provided by law. A. Corporate liquidation B. Corporate dissolution C. Corporate rehabilitation D. Corporate termination 2. It refers to process of winding up the affairs of the corporation by settling its corporate debts and distributing the remainder to the stockholders. A. Corporate liquidation B. Corporate dissolution

C. Corporate rehabilitation D. Corporate termination 3. After the date of corporate dissolution, what is the maximum period allowed by law to a dissolved corporation to complete its liquidation process? C. 3 years A. 1 year B. 2 years D. 4 years 4. Which of the following best illustrates the insolvency of a firm? a. The filing of bankruptcy proceedings against the firm. b. A deficit in the firm's retained earnings. c. The firm has more liabilities than assets. d. The firm has negative working capital. 5. Which of the following is not a general objective of bankruptcy procedures? A. attempt to give the debtor a fresh start B. assurance that all obligations of the debtor will be satisfied completely C. assurance of an equitable distribution of the debtor's property among creditors D. None of the above is a general objective. 6. It is the initial report prepared at the start of the liquidating process. a. statement of love affairs b. statement of break up c. cooling-off statement d. statement of affairs 7. A special-purpose statement prepared to show financial condition of an insolvent business is the a. Charge & Discharge Account b. Deficiency Statement c. Realization & Liquidation Account d. Statement of Affairs 8. In the accounting statement of affairs, the gains or losses upon liquidation would equal A. net book value of assets minus book value of liabilities. B. the book value of assets minus their realizable value. C. total estimated realizable value of assets minus the amount assigned to secured creditors. D. total estimated realizable value of assets minus the amount remaining for Class 7 unsecured creditors. 9. A corporation's accounting statement of affairs shows a dividend of 115%. The dividend means that A. an error was made in the preparation of the statement. B. stockholders may expect some return on their interests. C. secured creditors will receive an amount in excess of the book value of their claims. D. unsecured creditors will receive an amount in excess of the book value of their claims. 10. The primary difference between a balance sheet and an accounting statement of affairs is that: a. A balance sheet reflects book values, while a statement of affairs emphasizes realization values. b. Assets are arranged in a different sequence. c. Liabilities are arranged in a different sequence. d. Owners' equity is not considered in the statement of affairs. 11. If the value of the pledged property is lesser than the obligation, what is the treatment of the liability? a. Partially secured. b. Fully secured. c. Collateralized.

d.

Unsecured.

12. In a liquidation proceeding, if the proceeds on the realization of an asset exceed the lien against that asset, the excess is assigned to a. The holder of the lien. b. Other lien holders whose assets will not realize a sufficient amount to cover their liens. c. Meet the claims of the unsecured creditors. d. The stockholders of the corporation. 13. Which of the following statements is correct? a. involuntary insolvency occurs when the insolvent corporation voluntarily applies, by petition to a court of law, to be discharged from its liabilities. b. Voluntary insolvency occurs when three or more creditors of the insolvent corporation file a petition to a court of law for the adjudication of the corporation as insolvent. c. The Conceptual Framework and the PFRSs apply to entities undergoing liquidation. d. The measurement bases under the Conceptual Framework and the PFRSs are not applicable to liquidating entities. 14. Which of the following is not considered an unsecured liability with priority? a. Administrative expenses b. Unpaid employee salaries and other benefits c. Liability with collateral security d. Taxes and assessments 15. The estimated deficiency to unsecured creditors without priority is computed as a. net free assets less total unsecured liabilities without priority b. net free assets divided by total unsecured liabilities without priority c. total assets at realizable value less total liabilities at realizable value d. a or c

MULTIPLE CHOICE (PROBLEMS): The next questions are based on the following information: Quitter Co. is undergoing liquidation. Relevant information follows:

Assets pledged with partially secured creditors Free assets

Carrying amount 80,000 220,000

Liabilities with priority Partially secured creditors Unsecured creditors

Expected settlement amount 16,000 75,000 155,000

Realizable value 50,000 160,000

Amount unsecured 25,000 155,000

1. What is the total amount available for payment of claims of unsecured, creditors? a. 210,000 b. 160,000 c. 144,000 d. 0

> Available for unsecured creditors Free assets 160,000 Liabilities with priority (16,000) Net free assets 144,000 2. What is the estimated amount of liquidating dividend per peso claim? a. 1.17 b. 1.03 c. 0.88 d. 0.80 Unsecured portion of partially secured creditors 25,000 Unsecured creditors 155,000 Total unsecured liabilities without priority 180,000 Net free assets 144,000 Divide by: Total unsecured liabilities without priority 180,000 Recovery per peso 0.80 3. What is the amount of deficiency to creditors? a. 36,000 b. 144,000 c. 160,000 d. 180,000 Assets pledged with partially secured creditors Free assets 160,000 Liabilities with priority (16,000) Partially secured creditors (75,000) Unsecured creditors (155,000) Deficiency (36,000)

50,000

4. The following data were taken from the statement of affairs for Liquo Company: Assets pledged for fully secured liabilities (fair value, P75.000). Assets pledged to partially secured liabilities (fair value, P52,000) Free assets (fair value, P40,000) Unsecured liabilities with priority Fully secured liabilities Partially secured liabilities Unsecured liabilities without priority

P90,000 74,000 70,000 7,000 30,000 60,000 112,000

Compute the: (1) total estimated deficiency to unsecured creditors, and (2) the expected recovery per peso of unsecured claims. a. b.

(1) P42,000; (1) P3,000;

(2) P.65 (2) P.98

c. d.

(1) P -0-; (1) P42,000;

Bang Co . is undergoing liquidation. Relevant information follows:

(2) P1.00 (2) P.70

Accounts receivable Inventories Land Building

Carrying amount 300,000 110,000 150,000 400,000

The accounts receivable has a realizable value of P320,000. The accounts receivable has been pledged to secure notes payable with an expected settlement amount of P280.000. The inventories have a total realizable value of P70,000. Included in the inventories are inventories with carrying amount of P50,000 and realizable value of P60,000 which have been pledged to secure an account payable with an estimated settlement amount of P40,000. The land and building have a total realizable value of P450.000. Both assets have been used as collateral security for a bank loan of P250.000. 5. What is the estimated amount available for preferred claims and unsecured creditors out of assets pledged with fully secured creditors? a. 200,000 b. 240,000 c. 270,000 d. 320,000 Assets pledged to fully Realizable Available for secured creditors: value unsecured creditors Accounts receivable 320,000 Notes payable (280,000) 40,000 Land and building 450,000 Bank loan (250,000) 200,000 Estimated amount out of assets pledged with fully secured creditors

240,000

6. What is the total amount of net free assets? a. 200,000 b. 240,000 c. 270,000 d. 320,000 Assets pledged to fully Realizable Available for secured creditors: value unsecured creditors Accounts receivable 320,000 Notes payable (280,000) 40,000 Land and building 450,000 Bank loan (250,000) 200,000 Inventories 70,000 Inventories pledged to partially secured creditors (40,000) 30,000 Net free assets 270,000 7. The First Family Bank loaned P4,000,000 to Belle Corporation. The loan is secured by a land with a book value and fair market value of P5,000,000 and P3,000,000, respectively. What amount will the bank received if unsecured creditors received 25% of their claims? a. P1,000,000 b. P3,000,000 c. P3,250,000 d. P4,000,000

Fully secured P 3,000,000 Unsecured claim (PI,000,000 x 25%) 250,000 Amount received by the bank P3,250,000 8. When the Insolvent Company filed for bankruptcy, it prepared the following balance sheet: Current assets (net realizable value P500,000) P 800,000 Land and building (fair market value P2,400,000) 2,000,000 Goodwill 400,000 P3,200,000 Accounts payable (unsecured) P1,600,000 Mortgage payable (secured by land and building) 2,000,000 Common stock 1,000,000 Retained earnings (deficit) ( 1,400,000) P3,200,000 What percentage of their claims will the unsecured creditors likely to get? a. 43.75% b. 50% c. 56.25% d. 100% Current assets at realizable value 500,000 Land and building at fair value 2,400,000 Less: Mortgage payable Total realizable value 2,000,000 Divided by accounts payable 1,600,000 Percentage of claims of unsecured creditors 56.25%

400,000

9. Sayap Company signed a note payable to its bank for P2,000,000. Accrued interest on the note on February 29, 2008 amounts to P50,000. The note is secured by inventory with a book value of P2,300,000. The inventory is sold for P1,600,000 and unsecured creditors receive 30% of their claims. What amount should the bank receive in settlement of the note and interest? a. P2,050,000 b. P2,000,000 c. P1,705,000 d. P1,600,000 Proceeds for inventory 1,600,000 Unsecured note balance and interest at 30% [(P300,000 + P50,000) x 30%] Payment to Bank ,705,000

105,000

10. The following data were taken from the statement of realization and liquidation of Bagsak Corporation for the three month period ended December 31, 2013: Assets to be realized P55,000 Assets acquired 60,000 Assets realized 70,000 Assets not realized 25,000 Liabilities to be liquidated 90,000 Liabilities assumed 30,000 Liabilities liquidated 60,000 Liabilities not liquidated 75,000 Supplementary credits 85,000 Supplementary charges 78,000

What is the net income (loss) for the period? a. P28,090 b. P(28,000) c. P(35,000) d. P7,000 Debits: Assets to be realized P55,000 Assets acquired 60,000 Liabilities not liquidated 75,000 Liabilities liquidated 60,000 Supplementary charges 78,000 P328,000 Credits: Assets realized P70,000 Assets not realized 25,000 Liabilities to be liquidated 30,000 Supplementary credits 85,000 300,000 Net loss P28,000 11. A statement of realization and liquidation has been prepared. Totals therefrom are as follows: Assets to be realized P80,000 Assets acquired 40,000 Assets realized 30,000 Assets not realized 90,000 Liabilities to be liquidated 80,000 Liabilities assumed 50,000 Liabilities liquidated 100,000 Liabilities not liquidated 30,000 Supplementary credits 110,000 Supplementary charges 98,000 The ending balances of capital stock and retained earnings are P100,000 and P18,00 respectively. How much was the ending balance of cash? a. P35,000 b. P45,000 c. P58,000 d. P59,000 ...