Corporate Liquidation, statement of affairs

This will serve as a guide for all students who take up corporate liquidation.

1. CORPORATE LIQUIDATION

2. Statement of Affairs It is prepared under a quitting-concern assumption and makes the following classifications as to assets and liabilities: Assets: Pledged with Fully Secured Creditors – estimated cash proceeds is equal to or more than the amount of the secured claim. Pledged with Partially Secured Creditors – estimated cash proceeds is less than the amount of the secured claim. Free Asset – any asset of the entity that has not been used to secure the payment of any of the company’s liabilities and therefore any cash proceeds therefrom is available to unsecured creditors.

3. Liabilities Secured Liabilities – that which is covered by a collateral asset (a) Fully-secured – the realizable value of the pledged asset is at least equal to the amount of the claim. (b) Partially-secured liabilities – the realizable value of the pledged asset is less than the amount of the claim. Every partially secured claim has a secured portion, which is covered by the realizable value of the collateral and an unsecured portion, that which is not covered. (2) Unsecured Liabilities – that which is not covered by a pledged asset. (a) Unsecured liabilities with priority – those that are specified under the Bankruptcy Law that must be paid in full ahead of any other type of unsecured liabilities. (b) Unsecured liabilities without priority – is any other type of unsecured liability

4. Unrecorded assets with market values are included in the statement of affairs under free assets category and are called contingent assets; unrecorded administrative and liquidation expenses are categorized as unsecured with priority, and are called contingent liabilities. The statement of affairs measures in estimated terms what payments are to be received by the different types of creditors in the event of liquidation.

5. Estimated cash available(Cash on Hand plus Realizable values of all assets) Px Less prioritized claims: Fully secured creditors Px Secured portion of partially-secured Creditors x Unsecured creditors with priority x (x) Net cash available to unsecured amount Px Less (b) Unsecured amounts: Unsecured portion of partially secured Creditors Px Unsecured creditors without priority x (x) Estimated deficiency to creditors P(x) The estimated recovery rate for unsecured Amounts: (a)/(b) = ERR%

6. Another method of estimating the amount of deficiency to unsecured creditors without priority Estimated loss on sale of non-cash assets PX Plus contingent liabilities X Estimated gross loss PX Less: Estimated gain on sale of non-cash Assets PX Plus contingent assets X (X) (x) Estimated net loss P(X) (y) Compare with carrying value of SHE X IF (x) and (y) are equal amounts, available cash covers exactly outstanding liabilities; no deficiency to creditors AND no amount is recoverable by stockholders. IF (x) is more than (y), the peso amount difference is an Estimated Deficiency to creditors. IF (x) is less than (y), the peso amount difference is an estimated amount recoverable by Stockholders.

7. Accounting and Reporting by the Trustee The trustee is required to prepare the following periodic statements and reports: Cash receipts and disbursements statement, a Statement of Estate Equity; and supporting exhibits of assets still held and liabilities not yet liquidated as at the end of the reporting period (balance sheet). The Statement of Realization and Liquidation could also be required.

8. The following information is available on September 20, 2023, for BRAND and NEW COMPANY, which is having difficulty in paying its liabilities as they become due: Carrying Amount Cash P 6,881 Accounts receivable, net, fair value equal to carrying amount 79,135 Inventories, current fair value , P30,966 pledged on P36,127 of notes payable 67,093 Machinery and equipment, net, current fair value of P115,950 pledged on mortgage note payable 184,075 Office supplies, current fair value of P4,301 3,440 Total Assets P340,624 Wages payable 9,978 Taxes payable 2,065 Accounts payable 103,219 Notes payable, P36,127 of which is secured by inventories 68,813 Mortgage note payable 86,704 Common stock, P10 par 172,032 Retained earnings, deficit 102,187 Total Liabilities and Equity P340,624 Additional information: Estimated liability to the trustee is P44,728. A delivery van previously given to the supervisor was returned to the company, fair market value, P43,008. REQUIRED: Prepare a statement of affairs as of September 20, 2024. Compute the estimated recoverable amounts to the different types of creditors in the event of liquidation. Prepare a statement of deficiency to unsecured creditors at September 20, 2024

9. The balance sheet of BIGBOY ENTERPRISES at June 10, 2023 follows. At this date an interim trustee was appointed by the court to assume control of BIGBOY’s estate and liquidate the distressed corporation. Cash P 15,360 Accounts receivable 30,720 Inventories 138,240 Land 76,800 Buildings, net 384,000 Intangible assets 99,840 Total P744,960 Accounts payable P 192,000 Notes payable 153,600 Deferred revenue 3,840 Wages payable 11,520 Mortgage note payable 307,200 Capital stock 153,600 Retained earnings, deficit (76,800) Total P744,960

10. Additional information: The land and the buildings are pledged as security for the mortgage payable. in June, 2023, BIGBOY received P3,840 from a customer as payment in advance for merchandise that is no longer marketed and thus can no longer be provided. Activities of the trustee during June are summarized as follows: P27,648 is collected on the receivables. b. Inventories are sold for P74,496. c. Land and buildings bring total of P384,000. d. Nothing is realized from the intangible assets. e. Administrative expenses of P31,488 are incurred by the trustee. REQUIRED: Prepare journal entries in the books of the trustee and in the books of the distressed company for the above transactions. 2. Prepare a statement of realization and liquidation using the conventional method..