MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY

COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

DEPARTMENT OF ACCOUNTANCY

ACT130: Accounting for Special Transactions

Corporate Liquidation

LESSON OBJECTIVES
At the end of this module, you will be able to:
1. Know and describe the accounting for non-going concern entities;
2. Know how to prepare a statement of affairs

OVERVIEW
A corporation which is financially distressed may resort either a rehabilitation process or a
liquidation process if it cannot be turned around anymore. This module discusses financial
reporting of corporation on the process of liquidation particularly the liquidation of corporations
covered by Republic Act No. 10142 or the Financial Rehabilitation and Insolvency Act (FRIA) of
2010.

ABSTRACTION

CORPORATE LIQUIDATION
Corporate liquidation is the winding up of business affairs of the corporation due to its inability to
pay its creditors. It is when its total assets are less than its liabilities. (Insolvency)

An insolvent corporation may undergo rehabilitation process such as debt-restructuring or quasi-

reorganization; otherwise, if the corporation cannot be saved anymore, it will undergo the
liquidation process.

LIQUIDATION OF CORPORATION
Liquidation of insolvent corporation may be voluntary or involuntary
1. Voluntary Liquidation – an insolvent corporation may apply for liquidation by filing a petition
for liquidation with the court. It is the one initiated the liquidation. The petition shall verify
the insolvency of the corporation and shall contain, whether as an attachment or as part
of the body of the petition:
a. A schedule of its debts and liabilities including a list of creditors with their
addresses, amounts of claims and collaterals, or security, if any;
b. An inventory of all its assets including receivables and claims against third parties;
c. The names of at least three nominees in the position of the liquidator.

If the petition is sufficient in substance and in form, the court shall issue a liquidation order.

2. Involuntary Liquidation – it is when three or more creditors, the aggregate of whose claims
is at least either 1 million pesos or at least 25% of the subscribed capital stock, whichever
is higher, may apply for and seek the liquidation of an insolvent corporation by filing a
petition in court.

STATEMENT OF AFFAIRS
The financial statement of the corporation should not be prepared with a Going Concern but in a
Financial Statement of Liquidation or Statement of Affairs. (Quitting Concern)

Assets and Liabilities should be presented according to:

❖ Assets measured at Estimated Realizable Value

1
 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

a. Assets pledged with fully secured creditors. These are assets whose estimated
realizable value is equal or greater than the liabilities secured by them. The excess
over the liabilities attached with become part of the free assets available for unsecured
creditors.
b. Assets pledged with partially secured creditors. These are assets whose ERV is
less than liabilities secured by them. The excess liabilities will become part of the
unsecured liabilities without priority.
c. Free assets. These are the assets not held as collateral or security to liabilities and are
available for unsecured creditors.

❖ Liabilities or claims are to be classified as:

a. Unsecured Liabilities without priority. Although not secured, these liabilities are
preferred before any payment to the general unsecured creditors is made. The
following are liabilities with priority:
i. Administrative expense incurred in the liquidation process;
ii. Unpaid employees’ salaries, wages, and benefit plans;
iii. Taxes
b. Fully secured liabilities. These are creditors’ claim whose amount is less than or
equal to the ERV of assets that secure them.
c. Partially secured liabilities. These are creditors’ claim whose amount is greater than
the ERV of assets that secure them /
d. Unsecured liabilities without priority. These are creditors’ claim that are not secured
by any asset nor with priority.
❖ Other items that need to be considered:
o Estimated deficiency to unsecured non-priority creditors. This is computed as
net free assets less total unsecured liabilities without priority. Alternatively, it can be
computed as total estimated realizable value of assets less total claims.
o Estimated recovery rate to unsecured non-priority claims. This ratio measures the
amount that a creditor (unsecured non-priority) can expect to receive for every peso
of unsecured non-priority claim.it is also known as estimated dividend to unsecured
non-priority creditor. The formula to compute this ratio is:
ESTIMATED RECOVERY RATE = Net Free Assets ÷ Total Unsecured Non-
Priority Claims

STATEMENT OF REALIZATION AND LIQUIDATION

The liquidation process may take some time before it is completed. Therefore, there is a need to
provide periodic financial reports that show information on the progress of the liquidation process,
most especially in cases where the winding up affairs of the insolvent corporation is entrusted to
a receiver. These financial reports take the form of a statement of realization and liquidation.

The statement is depicted like a T-Account.

2
 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

DEBITS CREDITS
Assets to be realized, excluding cash Assets Realized
Assets acquired Assets not realized
Liabilities liquidated Liabilities to be liquited
Liabilities not liquidated Liabilities assumed

Supplementary Expense Supplementary income

The accounts above are designed in such a way that the accountability of the receiver or trustee
is highlighted. Thus, assets and liabilities by the receiver or trustee from the insolvent corporation
are presented separately from newly acquired assets and assumed liabilities. Moreover, the net
proceeds from the actual sale of assets and the actual settlement amount of liabilities settled are
also presented.

APPLICATION
ILLUSTRATION:
X corporation filed a petition under for bankruptcy on June 30, 2018. Data relevant to its financial
position as of this date are:

Book Value Est. NRV

Cash P3,000 P3,000
Accounts Receivable – net 72,000 48,000
Inventories 60,000 72,000
Equipment – net 165,000 87,000
Total Assets P300,000 P210,000

Accounts Payable P72,000

Rent Payable 21,000
Wages Payable 45,000
Note Payable plus accrued interest 96,000
Capital Stock 180,000
Retained Earnings (deficit) (120,000)
Total L&E P300,000

Required:
a. Prepare statement of affairs assuming that the note payable and interest are secured by
a mortgage on the equipment.
b. Estimate the amount that will be paid to each class of claims if the priority liquidation
expenses including trustee fees are P24,000 and estimated net realizable values are
actually realized.

Solution:
X Corporation
Statement of Affairs
June 30, 2018

3
 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Deficiency
Account
Book Value Assets Realizable Value (Loss/Gain)
Pledged with partially secured creditors
P165,000 Equipment-net P87,000 (78,000)
Less: Note payable and accrued interest (96,000) P 0
Unsecured amount (See below) (9,000)

Free Assets
3,000 Cash 3,000
72,000 Accounts receivable-net 48,000 (24,000)
60,000 Inventories 72,000 12,000
Total net realizable value 123,000
Less: Priority liabilities – wages payable (45,000)
Total available for unsecured creditors 78,000
______ Estimated deficiency to unsecured creditors 30,000 ______
P300,000 P108,000 (90,000)

Unsecured
Book Value Equities Liabilities

Priority liabilities
P 45,000 Wages payable (assumed under
P4,650 per employee) P 45,000

Partially secured creditors

96,000 Note payable and accrued interest P 96,000
Less: Equipment pledged as security (87,000) P 9,000

Unsecured creditors
72,000 Accounts payable 72,000
27,000 Rent payable 27,000

Stockholders’ equity
180,000 Capital stock 180,000
(120,000) Retained earnings (deficit) ______ (120,000)
P300,000 P108,000 P 60,000
Estimated Deficiency P(30,000)

B. Estimated payments per dollar for unsecured creditors

Cash available P210,000

Distribution to partially secured and unsecured priority creditors:

Note payable and interest P87,000

4
 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Administrative expenses 24,000

Wages payable 45,000 (156,000)
Available to unsecured nonpriority creditors P 54,000

Note payable and interest (unsecured portion) P 9,000

Accounts payable 72,000
Rent payable 27,000
Unsecured nonpriority claims P108,000

(P54,000 / P108,000 = $0.50 per dollar)

Expected recovery for each class of claims

Partially secured
Note payable and interest
Secured portion P87,000
Unsecured portion (P9,000 × 0.50) 4,500 P91,500

Unsecured priority
Administrative expenses P24,000
Wages payable 45,000 69,000

Unsecured nonpriority
Accounts payable (P72,000 × 0.50) P36,000
Rent payable (P27,000 × 0.50) 13,500 49,500
Total payments P210,000

ILLUSTRATION 2:
The following data are taken from the statement of affairs of A Company:
Assets pledged with fully secured creditors (RV, P635K) P800,000
Assets pledged with partially secured creditors (RV, P300K) 365,000
Free Assets (RV, P340,000) 535,000
Fully Secured Creditor Claims 316,000
Partially Secured Creditor Claims 400,000
Unsecured Creditor Claims with priority 100,000
General Unsecured Creditor Claims 1,165,000

Required: Compute the amount that will be paid to each class of creditors.

Solution:
Realizable value of all assets (P635,000 + P300,000 + P340,000) P1,275,000
Allocated to:
Fully secured creditors (316,000)
Partially secured creditors (300,000)
Unsecured creditors with priority (100,000)
Remainder available to general unsecured creditors P559,000

Payment rate to general unsecured creditors

(Including balance due to partially secured creditors)
P559,000 / (P1,165,000 + (P400,000 - P300,000)) 44.2%

5
 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Realizable value of assets:

Assets pledged to fully secured creditors P635,000
Assets pledged to partially secured creditors 300,000
Free assets 340,000
Total realizable value P1,275,000

Amounts to be paid to:

Fully secured creditors P316,000
Partially secured creditors [P300,000 + (0.442 × P100,000)] 344,200
Unsecured creditors with priority 100,000
General unsecured creditors (0.442 × P1,165,000) 514,800*
Total P1,275,000

REFERENCES
BALOCATING, R. (2015). Advanced Accounting. Quezon City: C&E Publishing, Inc.
Dayag, A. J. (2015). Advanced Accounting 1. Manila: Lajara Publishing House.
MILLAN, Z. V. (2018). Accounting for Special Transactions. Baguio City: Bandolin Enterprise.