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CHAPTER 14 SUGGESTED ANSWERS

EXERCISES

Exercise 14 - 1 Book Value P44,000 33,000 Assets Free assets: Finished goods Work in process: Est. value upon completion Costs to complete: Materials labor and other costs Materials Required to complete WIP Balance, est. to realize Appraised Value P49,000 P70,000 (10,000) (17,000) P10,000 27,000 43,000 37,000 43,000 37,000 (10,000) 3,000
Est. Amount Available

Loss (Gain) on Realization (P 5,000)

P49,000

40,000

Exercise 14 - 2 When there are mutual debts between a bankrupt and a creditor, one balance is set off against the other and only the difference is recognized for purpose of settlement. Therefore: (1) Under the heading "Unsecured Creditors", the cash in the savings account with AB Bank, P7,000, will be applied against the cash overdraft in the checking account with AB Bank, P9,000, and the overdraft excess of P2,000 will be extended to the "Amount Unsecured" column; Under the heading "Free Assets", the cash overdraft in the checking account with CD Bank, P3,000, will be applied against the cash balance representing sinking fund accumulation with CD Bank, P33,000, and the sinking fund excess of P30,000 will be extended to the "Estimated Amount Available" column.

(2)

Book values of the asset and liability items would be listed in the "Book Value" columns within the sections indicated above, with subtraction items being reported as negative balances in the "Book Value" columns.

Exercise 14 - 3

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Book Value P20,000

Assets Assets pledged with fully secured creditors: (a) Mercury stock (200 shares) Less Claim (see contra) Assets pledged with partly secured creditors: (d) Accounts receivable (deducted contra) Free assets: (a) Mercury stock (200 shares)
(b) Work in process: Est. value upon completion Materials labor (c ) Materials Required to complete WIP Balance, est. to realize

Appraised Value P22,000 21,000 40,000 P22,000

Est. Amount Available

Loss (Gain) on Realization (P 2,000)

P 1,000 50,000 22,000 ( 2,000)

90,000 20,000 40,000

P36,000 ( 1,000) ( 4,000) P 1,000 25,000

31,000 26,000

31,000 26,000

9,000 ( 2,000) Amount Unsecured

24,000

Book Value P21,000

Liabilities and Stockholders' Equity Fully secured creditors: Claims (deducted contra) Partly secured creditors: Notes payable Less security: Accounts receivable (see contra)

P21,000 P45,000 40,000

45,000

P 5,000

Exercise 14 - 4 Cameron Company, Debtor Deficiency Statement Estimated losses on realization of assets:

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Accounts receivable Inventories Prepaid insurance and other prepaid expenses Machinery and equipment Goodwill and patents Additional liabilities: Liquidation costs Contingent liabilities Estimated gross loss Deduct: Estimated gains on realization of assets: Land and buildings Estimated net loss Loss to be borne by owners: Capital stock Less deficit Estimated deficiency to unsecured creditors Exercise 14 - 5 Clippers Company, Debtor Statement of Affairs November 30, 2008 With Priority P 30,000 P 30,000 P200,000

P13,200 48,000 1,200 40,000 90,000 P10,000 15,000

P192,400 25,000 P217,400 45,000 P172,400

P200,000 31,000

169,000 P 3,400

Liabilities Mortgage payable Notes payable Liabilities with priority Unsecured liabilities Totals

Creditors Fully Partly Secured Secured P200,000 P 80,000 P 80,000

Unsecured P 20,000 210,000 P230,000

Assets Land and buildings Furniture and equipment Other assets Creditors with priority Totals

With Priority

Assets Available to Creditors Fully Partly Secured Secured P200,000 P 80,000 P200,000 P 80,000

Unsecured P120,000 90,000 ( 30,000) P180,000

P 30,000

Total unsecured creditors Estimated amount available to unsecured creditors without priority Estimated deficiency to unsecured creditors Estimated amount payable per peso of unsecured liability (P180,000/P230,000) PROBLEMS

P230,000 180,000 P 50,000 P .78

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Problem 14 - 1 Broadway Statement January

Book Value Assets Appraised Value Estimated Amount Available Loss (Gain) on Realization

Assets pledged with fully secured creditors: P60,000 Merchandise inventory Less Claim: Note payable and accrued interest (see contra) Assets pledged with partly secured creditors: 36,000 Delivery equipment (deducted contra) 9,700 41,000 87,000 20,000 8,000 50,000 1,000 Free assets: Cash Notes receivable and accrued interest Accounts receivable Merchandise inventory Furniture and fixtures Goodwill Prepaid insurance Estimated amount available Creditors with priority (see contra) Estimated amount available to unsecured creditors without priority (approximately P.71 on the peso) Estimated deficiency to unsecured creditors P312,700

P 42,000 40,400 P 28,000 9,700 26,800 75,000 14,000 9,000 0 0 9,700 26,800 75,000 14,000 9,000 0 0 P136,100 12,800 P123,300 49,900 P173,200 P 1,600

P 18,,000

8,000

14,200 12,000 6,000 (1,000) 50,000 1,000 P 108,200

Company of Affairs 31, 2008

Book Value Liabilities and Stockholders' Equity Amount Unsecured

Creditors with priority: Estimated liquidation expenses 800 Accrued salaries and wages

P12,000 800

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40,000 400 30,000 900

30,000 300 136,000 100,000 10,000 (35,700) P312,700

Total (deducted contra) Fully secured creditors: Notes payable Add Accrued interest on notes payable Total (deducted contra) Partly secured creditors: Notes payable Add Accrued interest on notes payable Total Less security; Delivery equipment (see contra) Unsecured creditors: Notes payable Add accrued interest on notes payable Accounts payable Notes receivable discounted Stockholders' equity: Capital stock Premium on stock Deficit Total unsecured liabilities

P12,800 P40,000 400 P40,400 P30,000 900 P30,900 28,000 P30,000 300

P 2,900 30,300 136,000 4,000

P173,200

Problem 14 1 Req. 2 Broadway Company, Debtor Deficiency Statement January 31, 2008 Estimated losses on realization of assets: Merchandise inventory Delivery equipment Notes receivable and accrued interest Accounts receivable Goodwill P 24,000 8,000 14,200 12,000 50,000

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Prepaid insurance Additional liabilities: Estimated liquidation expenses Notes receivable discounted Estimated gross loss Deduct: Estimated gains on realization of assets: Furniture and fixtures Estimated net loss Loss to be borne by owners: Capital stock Premium on stock Less deficit Estimated deficiency to unsecured creditors

1,000 P 12,000 4,000

P109,200 16,000 P125,200 1,000 P124,200

P100,000 10,000 P110,000 35,700

74,300 P 49,900

Problem 14 2 (Req. 2) Crooked Company Deficiency Statement July 1, 2008 Estimated losses on realization of assets: Land and buildings Finished goods Accounts receivable Work in process Materials Patterns, jigs, and tools Machinery and equipment P 20,000 12,000 6,000 20,000 6,000 32,000 54,000

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Prepaid insurance Additional liabilities: Estimated liquidation expenses Accrued wages Estimated gross loss Deduct: Estimated gains on realization of assets: Intangibles Estimated net loss Loss to be borne by owners: Common stock Additional paid-in capital Less Deficit Estimated deficiency to unsecured creditors

2,000 P25,000 800

P158,000

25,800 P183,800

4,998 P178,802 P200,000 31,000 P231,000 120,398

110,602 P 68,200

Problem 14 2 (Req. 1) Crooked Statement July

Book Value Assets Appraised Value Estimated Amount Available Loss (Gain) on Realization

P60,000 100,000

42,000 8,100 79,000

Assets pledged with fully secured creditors: Land Buildings Less claim: First mortgage bonds and accrued interest (see contra) Assets pledged with partly secured creditors: Finished goods (deducted contra) Free assets: Cash Accounts receivable

P140,000 123,000 P 36,000 8,100 73,000 8,100 73,000 P17,000

P20,000

6,000 6,000

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42,000 70,000 40,000 40,000 70,000 2 2,000

Finished goods Work in process: Est. value upon completion Less cost to complete Materials Patterns, jigs, and tools Machinery and equipment Intangibles Prepaid insurance

36,000 P80,000 30,000 50,000 28,000 8,000 16,000 5,000 0

36,000 50,000 28,000 8,000 16,000 5,000 0 P241,100 33,500 _______ P207,600 68,200 P275,800

6,000 20,000 12,000 32,000 54,000 ( 4,998) 2,000 P153,002

Estimated amount available Creditors with priority (see contra) Estimated amount available to unsecured creditors without priority (approximately P0.75 on the peso) _______ Estimated deficiency to unsecured creditors P553,102

Company of Affairs 1, 2005

Book Value Liabilities and Stockholders' Equity Amount Unsecured

P 7,700 120,000 3,000 50,000 1,200

Creditors with priority: Estimated liquidation expenses Accrued wages Total (deducted contra) Fully secured creditors: First mortgage bonds Add Accrued interest on mortgage bonds Total (deducted contra) Partly secured creditors: Notes payable Add Accrued interest on notes payable

P 25,000 8,500 P 33,500 P120,000 3,000 P123,000 P 50,000 1,200 P 51,200

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77,000 3.600 180,000 200,000 31,000 (120,398)

Less security: Finished goods (see contra) Unsecured creditors: Notes payable Accrued interest on notes Accounts payable Stockholders" equity: Common stock Additional paid-in capital Deficit

36,000 P 77,000 3,600

P 15,200 80,600 180,000

_______ P553,102 Total unsecured liabilities

_______ P275,800

Problem 14 - 2 Crooked Company Summary of Estimated Payments to Creditors July 1, 2008 Percentage Payment Creditors with priority: Estimated liquidation expenses Accrued wages Fully secured creditors: First mortgage bond Accrued interest on bonds Partly secured creditors: Notes payable Accrued interest on notes payable Secured 100% 100 100% 100 --------100% Claim P 25,000 8,500 P120,000 3,000 P 50,000 1,200 P 51,200 36,000 Amount to be Paid P 25,000 8,500 P 33,500 P120,000 3,000 P123,000 --------------P 36,000

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Unsecured Unsecured creditors: Notes payable Accrued interest on notes payable Accounts payable

75 75% 75 75

P 15,200 P 77,000 3,600 180,000

11,400 P 47,400 P 57,750 2,700 135,000 P195,450

Note relative to "Summary of Estimated Payments to Creditors": Estimated payment on the unsecured portion of the notes of P11,400, and on the remaining unsecured liabilities, P195,450, results in a total of 206,850, which is p750 less than the estimated amount to become available to unsecured creditors as reported by the statement of affairs. The discrepancy emerges because the estimated amount available as determined by the statement is actually slightly more than the 75% figure and the resulting discrepancy is not objectionable, however, in view of the fact that the data are presented as estimates and a refinement of such data would suggest a degree of accuracy that is not attainable.

Problem 14 - 6 Payless Statement June

Book Value Assets Appraised Value Estimated Amount Available Loss (Gain) on Realization

P 80,000 26,000 180,000 240,000

Assets pledged with fully secured creditors: Accounts receivable Less claim; Notes payable (see contra) Land Buildings Machinery Total Less claim: Mortg.and accrued int. (see contra) Assets pledged with partly secured creditors: Marketable securities Accrued interest Total (deducted contra) Free assets: Cash

P 80,000 60,000 P 50,000 200,000 150,000 P420,000 264,800 P 38,000 400 P 38,400 P 3,000

P20,000 (P 24,000) ( 40,000) 90,000 155,200 2,000 ( 400)

40,000

4,000

3,000

1,000

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60,000 120,000 80,000 40,000 10,000

Accounts receivable Add credit balance (see contra) Finished goods Materials, expected to be realized as finished goods Less cost to complete Goodwill Prepaid expenses

P60,000 10,000 P140,000 20,000

70,000 100,000 120,000 0 0

70,000 100,000 120,000 ______ P468,200 83,000 P385,200 36,400 P421,600

20,000 ( 40,000) 40,000 10,000 P 58,600

Estimated amount available Creditors with priority Estimated amount available to unsecured creditors w/o priority _______ Estimated deficiency to unsecured creditors P880,000 (2)

Estimated settlement per peso of unsecured liabilities: estimated amount available, P385,200, divided by total unsecured liabilities, P421,600, 91% or P0.91 on the peso.

Corporation of Affairs 30, 2008

Book Value Liabilities and Stockholders' Equity Amount Unsecured

P 30,000

Creditors with priority: Withheld taxes payable Employer payroll taxes payable 30,000 Accrued wages Estimated liquidation expenses Auditor's fee for liquidation work Total (deducted contra) Fully secured creditors: Notes payable (deducted contra) Mortgages payable Add Accrued interest Total (deducted contra) Partly secured creditors: Notes payable Less security: Marketable securities and accrued interest (see contra)

P 30,000 1,000 30,000 20,000 2,000 P 83,000 P 60,000 P260,000 4,800 P264,800 P 40,000 38,400 P 1,600

60,000 260,000

40,000

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130,000 170,000

Unsecured creditors: Accounts payable Notes payable Accounts receivable (credit balances) Unbilled auditor's fee Estimated liability on pending damage suit

130,000 170,000 10,000 10,000 100,000

Stockholders' equity: 200,000 Common stock (40,000) Retained earnings (deficit) _______ _ P880,000 Total unsecured liabilities

_______ P421.600

Problem 14 8 Mackintosh Statement November

Book Value Assets Appraised Value Estimated Amount Available Loss (Gain) on Realization

P105,000 130,000

90,000 31,500 125,000 230,000 110,000 100,000

Assets pledged with fully secured creditors: Land Buildings Less claim, mort. payable, and accrued interest (see contra) Assets pledged with partly secured creditors: Investments (deducted contra) Free assets: Cash Accounts receivable Inventories Machinery and equipment (net) Goodwill

P250,000 205,000 55,000 31,500 106,500 145,000 30,000 0 31,500 106,250 145,000 30,000 0 P357,750 35,700 P322,050 40,450 P 45,000

(P 15,000)

35,000 18,750 85,000 80,000 100,000 303,750

Estimated amount available Creditors with priority (see contra) Estimated amount available to unsecured creditors w/o priority _______ Estimated deficiency to unsecured creditors

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P921,500 (2)

P362,500

Estimated amount available, P322,050, divided by total unsecured liabilities, P362,500, equals estimated amount payable on claims, 89% or 89 centavos on the dollar.

Company of Affairs 01, 2008

Book Value Liabilities and Stockholders' Equity Amount Unsecured

P200,000

80,000

335,000 400,000 50,000 (143,500) P921,500

Creditors with priority: Estimated liquidation expenses Taxes payable Wages payable Total (deducted contra) Fully secured creditors: Mortgage payable Add Accrued interest Total (deducted contra) Partly secured creditors: Notes payable Add accrued interest Total Less security: Investments (see contra) Unsecured creditors: Accounts payable Stockholders' equity: Common stock Additional paid-in capital Retained earnings (deficit) Total unsecured liabilities Additional paid-in capital is P50,000 instead of P40,000.

P 30,000 4,000 1,700 P 35,700 P200,000 5,000 P205,000 P 80,000 2,500 P 82,500 57,000

P 27,500 335,000

P362,500

CORRECTION:

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2. Mackintosh Company Deficiency Statement November 1, 2008 Estimated losses on realization of assets: Accounts receivable Inventories Investments Machinery and equipment Goodwill Additional liabilities: Estimated liquidation expenses Taxes payable Wages payable Accrued interest on notes payable Accrued interest on mortgage Estimated gross loss Deduct: Estimated gains on realization of assets: Land and buildings Estimated net loss Loss to be borne by owners: Capital stock Additional paid-in capital Less deficit Estimated deficiency to unsecured creditors P 18,750 85,000 35,000 80,000 100,000 P 30,000 4,000 1,700 2,500 5,000

P318,750

43,200 P361,950 15,000 P346,950

P400,000 50,000 P450,000 143,500

306,500 P 40,450

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