Corporate Liquidation

Insolvency – in the perspective of corporation, occurs when the debtor corporation is not able to pay
its debts as they come due or when its debts exceeds the fair value of its assets.
Equity insolvency – the inability to pay debt on time
Bankruptcy insolvency – having total assets exceed the fair value of the total assets
Voluntary bankruptcy proceeding – the debtor corporation files the petition for liquidation
Involuntary bankruptcy proceeding – the creditors of the debtor corporation files the petition for
liquidation
Receiver – a trustee appointed by the courts
Administrator – a trustee appointed by the debtor corporation
Statement of Affairs – a financial statement that emphasizes liquidation values and provides relevant
information for the trustee in liquidating the debtor corporation.
Statement of Realization and Liquidation – a statement showing a summary of liquidation activities
by the trustee

Classification of Corporate Liabilities

A. Liabilities with security (collateral)
1. Fully secured liabilities – liabilities with fair value of collateral asset in excess of debt value
2. Partially secured liabilities – liabilities with fair value of collateral asset insufficient to cover debt
value
B. Liabilities without security (collateral)
1. Unsecured liabilities
2. Priority liabilities – liabilities without collateral but are designated by the law to be paid before
any other debts of the corporation.
a. Salaries or wages payable
b. Dues to the government (i.e. income taxes, business taxes, excise taxes)
c. Estate administration costs (i.e. trust fees and liquidation costs)

Classification of Assets Based on Liabilities

A. Pledged assets
1. To fully secured liabilities
2. To partially secured liabilities
B. Free assets – assets not pledged to any debt

1. Mitdas has been undergoing liquidation since January 1. As of March 31, its condensed
statement of realization and liquidation is presented below”
Assets
Assets to be realized P1,375,000
Assets acquired 750,000
Assets realized 1,200,000
Assets not realized 1,375,000

Liabilities
Liabilities liquidated 1,875,000
Liabilities not liquidated 1,700,000
Liabilities to be liquidated 2,250,000
Liabilities assumed 1,625,000

Revenues
and
Expenses
Supplementary charges 3,125,000
Supplementary credits 2,800,000

The net gain (loss) for the three month period ending March 31 is:
A. 250,000
B. (325,000)
 C. 425,000
D. 750,000

2. Kayangan Co. filed voluntary bankruptcy petition on August 15, 2009 and the statement
of affairs reflect the following amounts:
Book Value Estimated Current Value
Assets
Assets Pledge with fully secured Creditors P300,000 P370,000
Assets Pledge Partially Secured Creditors 180,000 120,000
Free Assets 420,000 320,000
P900,000 P810,000

Liabilities
Liabilities with priority 70,000
Fully Secured Creditors 260,000
Partially secured creditors 200,000
Unsecured Creditors 540,000
P1,070,000

Assumed that the assets are converted to cash at estimated current values and the business is
liquidated. What amount of cash will be available to pay unsecured non-priority claims?
A. 240,000
B. 280,000
C. 320,000
D. 360,000

3. Barracuda Corp. was forced into bankruptcy and is in the process of liquidating assets
and paying claims. Unsecured claims will be paid at the rate of P0.40 on the peso. Hale holds
a P30,000 noninterest bearing note receivable from Barracuda collaterized by an asset with
book value of P35,000 and a liquidation value of P5,000. The amount to be realized by hale
on this note is
A. 5,000
B. 12,000
C. 15,000
D. 17,000

4. CYC, Inc. signed a note payable to its bank for P10,000. Accrued interest on the note on
February 28, 2004 amounts to P250. The note is secured by inventory with a book value of
12,000. The inventory is sold for 8,000 and unsecured creditors receive 30 percent of their
claims. The bank should receive the following amount in settlement of the note and interest.
A. 10,250
B. 10,000
C. 8,675
D. 8,000

5. Quin and Co., Inc. purchased a Cadillac automobile with little cash down and signed a note,
secured by the Cadillac, for 48 easy monthly payments. When the company files for
bankruptcy, the balance due on the Cadillac amount to 6,000,000. The car has a book value
of 8,000,000. And a net realizable value of 4,000,000. The unsecured creditors of Quin and
 Co. can expect to receive 50% of their claims. In the liquidation, the bank that holds the note
on the Cadillac should receive:
A. 6,000,000
B. 5,000,000
C. 4,000,000
D. 3,000,000

6. Lucky Company has filed for liquidation. The following data is available:

Free assets at net realizable value P100, 000

Liabilities per books (unsecured) P160, 000
Unrecorded liabilities:
Liquidation expenses P6, 000
Unpaid wages with priority claim P10, 000
What percentage of their claims should the unsecured creditors receive in the liquidation?

A. 62.5%
B. 56.82%
C. 55.29%
D. 52.5%

7. A company is to be liquidated and has the following liabilities:

Income taxes P 8,000
Notes payable (secured by land) 120,000
Accounts payable 83,000
Salary payable (evenly to two employees) 6,000
Bonds payable 70,000
Administrative expenses for liquidation 20,000

The company has the following assets:

Book Value Fair Value
Current assets P 80,000 P 33,000
Land 100,000 90,000
Building and equipment 100,000 110,000

How much will the holders of notes payable collect following the liquidation

A. P108,000
B. P83,000
C. P120,000
D. P90,000