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ADVANCED ACCOUNTING
Module 2: Corporate Liquidation
 The MAIN CONCERN of accounting problems on corporate liquidation is the proper
allocation of assets to creditors and shareholders.
 The primary difference between partnership liquidation and corporate liquidation is the extent
of liability of the owners of the business. Partners have unlimited liability. They are required to
invest extra cash to satisfy debts to creditors, unless they are insolvent. Shareholders, on the
other hand, have limited liability. Limited liability means they are only liable to the extent of
their investment.
 When a corporation is liquidated, the usual case is that assets are insufficient to satisfy amounts
owed to existing creditors. Normally, liabilities are unsecured (i.e. no collateral exist for the
liability). Some liabilities, however, have collateral-assets that may be sold to satisfy the debt.
 The following classification of assets and liabilities are relevant in corporate liquidation:

ASSETS:
1. Assets for fully-secured liabilities (AFS) – collateral assets whose FAIR VALUE (or
realizable value) is EQUAL OR GREATER than the BOOK VALUE of the corresponding
liability.
2. Assets for partially-secured liabilities (APS) – collateral assets whose fair value is
LESS THAN the book value of the corresponding liability.
3. Free assets (FA) – assets that are not used as collateral for any liability.
LIABILITIES:
1. Fully-secured liabilities (FSL) – debts that can be paid in full using their collateral
assets
2. Partially-secured liabilities (PSL) – debts that are only partially settled after payment
using their collateral assets
3. Unsecured liabilities with priority (UWP) – debts that have no security or collateral
but have priority of settlement using free assets due to their nature. These are usually
liabilities arising from law and legal proceedings. Common examples of unsecured
liabilities with priority are taxes payable to the government, amounts owed to employees
(i.e. salaries and wages payable) and liquidation expenses.
4. Unsecured liabilities without priority (UWOP) – debts that have no security and have
the least priority of all the liabilities. They can only be paid when there are remaining
free assets after settling fully-secured liabilities, partially-secured liabilities and
unsecured liabilities with priority.
 The payout ratio – the payout ratio is the most crucial ratio in corporate liquidation. It is used
to determine how the remaining free assets should be allocated to the remaining balance of
liabilities. The payout ratio is founded on the concept of fair allocation. The following is the
formula to compute the payout ratio:

Payout ratio = (FA, beg. + Excess of AFS over FSL – UWP)

(UWOP + Unsettled balance of PSL)

o Concept: Free assets plus any unused collateral is first used to settle unsecured liabilities
with priority. Any remaining assets are then allocated PROPORTIONATELY to the
unsecured liabilities without priority plus any unpaid balance of partially-secured debts.
o The payout ratio is usually in the form of a percentage or a decimal. A payout ratio of
60% (or 0.60) means that for every peso of remaining unpaid liabilities, 60 centavos of
assets will be received as payment.

 Other things to remember:

o When a corporation is being liquidated, the going concern is no longer applicable. Hence,
assets are valued at FAIR VALUE or REALIZABLE VALUE
o When a liability is interest-bearing, the unpaid (or accrued) interest and the principal is
considered to be one debt.

ADVACC (Acctg 630) – MODULE 2: CORPORATE LIQUIDATION

Ateneo de Zamboanga University – School of Management and Accountancy
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Practice problem:

Problem 1: The following information are related to Terminal Corporation which is undergoing
liquidation:

1. Bonds payable amounting to P73,600 is secured by Inventory with book value of P123,000
and net realizable value of 2/3 of the recorded amount.

2. Of the P195,600 accounts payable, P55,000 is secured by equipment with a carrying

amount of P76,800 which is 70% realizable.

3. Building with a carrying amount of P129,000 has a net realizable value of P99,000.

4. Other unrecorded liabilities are accrued interest payable on bonds, P3,100; salaries
payable, P17,400; taxes payable, P11,600; and trustee’s fee, P8,500.

5. Cash available prior to liquidation amounts to P11,900.

6. Total assets of Terminal Corp. presented in the statement of financial position prior to
liquidation amounts to P480,000. Except for prepaid expenses and goodwill with recorded
amounts of P7,600 and P22,000, respectively, remaining assets other than those whose
realizable values were mentioned above have a realizable value of 60% of the recorded
amount.

7. Total liabilities of Terminal Corp. presented in the statement of financial position prior to
liquidation amounts to P380,000.

Required: Prepare a statement of affairs to facilitate the corporate liquidation.

ADVACC (Acctg 630) – MODULE 2: CORPORATE LIQUIDATION

Ateneo de Zamboanga University – School of Management and Accountancy
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Problem 2: Almost Corporation is undergoing liquidation and has the following condensed
statement of financial position as of January 1, 2014:

ASSETS LIABILITIES AND EQUITY

Cash P12,000 Accrued payroll P44,000
Receivables (net) 280,000 Loans from officer 50,000
Inventory 70,000 Accounts payable 60,000
Prepaid expenses 1,000 Equipment loan payable 355,000
Plant assets 300,000 Business loan payable 180,000
Goodwill 39,000 Common stock 60,000
Deficit (47,000)
___________ ____________
TOTAL 702,000 TOTAL 702,000

The equipment loan payable is secured by the plant assets having a book value of P300,000 and a
realizable value of P350,000. Of the accounts payable, P40,000 is secured by inventory which has a
cost of P40,000 and a liquidation value of P44,000. The balance of inventory has a realizable value
of P32,000. Receivables with a book value and market value of P100,000 and P80,000, respectively,
have been pledged as collateral on the business loan payable. The balance of the receivables have a
realizable value of P150,000. Liabilities not reflected on the balance sheet are accrued interest on
equipment loan payable of P5,000; taxes payable of P6,000; and liquidation fees payable of P4,000.

Question 1: What is the estimated deficiency to unsecured creditors?

Question 2: What amount will be received by each type of creditor at the end of the liquidation
process? (i.e. fully-secured, partially-secured, unsecured with priority, unsecured without
priority)

Problem 3: Madigan Corp. has been undergoing liquidation since January 1. As of June 30, its
condensed statement of realization and liquidation is presented below: (no focus notes)

ASSETS
To be realized P1,375,000
Acquired 750,000
Realized 1,200,000
Not realized 1,375,000

LIABILITIES
Liquidated P1,875,000
Not liquidated 1,700,000
To be liquidated 2,250,000
Assumed 1,625,000

REVENUE & EXPENSES:

Supplementary charges P3,125,000
Supplementary credits 2,800,000

Question 1: The net gain (loss) on liquidation for the 6-month period ending June 30 is:

A. P425,000 B. P(325,000) C. P250,000 D. P750,000

Question 2: What is the ending cash balance assuming that common stock and deficits have ending
balances of P1,500,000 and P500,000, respectively?

A. P425,000 B. P575,000 C. P1,325,000 D. P1,375,000

Problem 4: Citymall Inc. has declared bankruptcy and has begun to liquidate. Unsecured claims
will be paid at the rate of 40 cents on the peso. A creditor holds a non-interest bearing note
receivable from Citymall Inc. in the amount of P65,000, collaterized by machinery with a book value
of P19,500 and liquidation value of P16,250. The total amount paid to the creditor is:

ADVACC (Acctg 630) – MODULE 2: CORPORATE LIQUIDATION

Ateneo de Zamboanga University – School of Management and Accountancy
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A. P16,250 B. P26,000 C. P35,750 D. P42,250

ADVACC (Acctg 630) – MODULE 2: CORPORATE LIQUIDATION

Ateneo de Zamboanga University – School of Management and Accountancy