Refresher 2

Corporate Liquidation

Multiple Choice – Problem

1. Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims.
Unsecured claims will be paid at the rate P0.40 on the peso. Hale holds a P30,000 noninterest
bearing note receivable from Seco collateralized by an asset with a book value of P35,000 and a
liquidation value of P5,000. The amount to be realized by Hale on this note is:
a. P5,000 c. P15,000
b. P12,000 d. P17,000
2. Kent Co. filed a voluntary bankruptcy petition on August 15, 2024, and the statement of affairs
reflected the following amounts:
Book value Estimated Current
Value
Assets
Assets pledged with fully secured creditors P300,000 P370,000
Assets pledged with partially secured creditors 180,000 120,000
Free assets 420,000 320,000
P900,000 P810,000
Liabilities
Liabilities with priority P70,000
Fully secured creditors 260,000
Partially secured creditors 200,000
Unsecured creditors 540,000
P1,070,000

Assume that the assets are converted to cash at the estimated current values and the business is
liquidated.

What amount of cash will be available to pay unsecured non-priority claims?

a. P240,000 c. P320,000
b. P280,000 d. P360,000
3. Scott Company filed a voluntary bankruptcy petition on June 25, 2024, and the statement of affairs
reflects the following amounts:
Book value Estimated Current
Value
Assets
Assets pledged with fully secured creditors P160,000 P190,000
Assets pledged with partially secured creditors 90,000 60,000
Free assets 200,000 140,000
P450,000 P390,000
Liabilities
Liabilities with priority P20,000
Fully secured creditors 130,000
Partially secured creditors 100,000
Unsecured creditors 260,000
P510,000

Assume that the assets are converted to cash at the estimated current values and the business is
liquidated.

What total amount of cash should the partially secured creditors receive?
a. P60,000 c. P90,000
 b. P84,000 d. P100,000

Items 4 to 6 are based on the following information:

In 2024, Camel Corp. was forced into bankruptcy and begun to liquidate. The following selected
account balances were taken from its statement of affairs:
Book value Estimated Current
Value
Assets pledged with partially secured creditors P80,000 P50,000
Free assets 220,000 160,000
Book Value Amount Unsecured
Preferred claims P16,000 P0
Partially secured creditors 75,000 25,000
Unsecured liabilities 155,000 155,000

4. What is the total amount available for payment of claims of unsecured creditors?
a. P0 c. P160,000
b. P144,000 d. P210,000
5. What is the estimated amount of liquidating dividend per peso claim (rounded to the nearest
centavo)?
a. P0.80 c. P1.03
b. P0.88 d. P1.17
6. What is the amount of deficiency to creditors?
a. P180,000 c. P144,000
b. P160,000 d. P36,000
7. In May 2024, it was determined that it is necessary to complete the work in process of Wild West
Corp. To complete the work in process, P10,000 book value of raw materials and supplies and
P10,000 conversion cost will be required. When completed these goods will probably sell for
approximately P50,000. The raw materials, which have a book value of P40,000, have an estimated
total realizable value of P20,000. What is the estimated amount that will become available for
unsecured creditors as a result of the realization of the work in process?
a. P50,000 c. P30,000
b. P35,000 d. P0

Items 8 and 9 are based on the following information:

The following selected account balances were taken from the balance sheet of Quitting Corp. as of
December 31, 2024, immediately before the take-over of the trustee:
Marketable securities P300,000
Inventories 110,000
Land 150,000
Building 400,000

Additional information:
 Marketable securities have present market value of P320,000. These securities have been
pledged to secure notes payable of P280,000.
 The estimated worth of inventories is P70,000. However, inventories with book value of P50,000
have been pledged to secure notes payable of P60,000. The realizable value of the inventories
pledged is estimated to be P40,000.
 Land and building are estimated to have a total realizable value of P450,000. This property is
pledged to secure the mortgage payable of P250,000.

8. What is the estimated amount available for preferred claims and unsecured creditors out of assets
pledged with fully secured creditors?
a. P840,000 c. P770,000
b. P810,000 d. P240,000
9. What is the total amount of net free assets?
 a. P810,000 c. P270,000
b. P770,000 d. P240,000
10. The accountant of Drifting Corp. prepared a statement of affairs. Assets which there are no claims of
all classes totaled to P1,050,000. The following data are claims deemed outstanding:
 Accrued salaries, P15,000.
 Unrecorded note for P10,000, on which P600 of interest has accrued held by Normandy Co.
 A note for P30,000 secured by P40,000 receivable, estimated to be 60% collectible held by Jones
Co.
 A P15,000 note, on which P300 interest has accrued held by James Pty. Property with a book
value of P10,000 and a market value of P18,000 is pledged to guarantee payment of principal
and interest.
 Unpaid income taxes, P35,000.

What is the amount realized by partially secured creditors?

a. P10,600 c. P24,900
b. P19,500 d. P27,900

Items 11 to 14 are based on the following information:

An entity is experiencing financial problems which resulted to its ultimate bankruptcy. The statement
of financial position of the said entity before its liquidation is presented below:
Cash P100,000 Income tax payable P200,000
Inventory 300,000 Salaries payable 300,000
Land 200,000 Notes payable 800,000
Mortgage payable 100,000
Accounts payable 400,000
Contributed capital 500,000
Deficit (1,700,000)

The following additional data are presented:

 The notes payable is secured by the inventory with net realizable value of P250,000.
 The mortgage payable is secured by the land with fair market value of P120,000.

11. What is the amount received by the holder of the notes payable at the end of corporate liquidation?
a. P320,000 c. P250,000
b. P300,000 d. P260,000
12. What is the amount received by the holder of the mortgage payable at the end of the corporate
liquidation?
a. P120,000 c. P150,000
b. P200,000 d. P100,000
13. What is the amount received by the employees at the end of corporate liquidation concerning their
salaries?
a. P100,000 c. P72,000
b. P120,000 d. P300,000
14. What is the amount received by the national government concerning its income tax claim?
a. P200,000 c. P48,000
b. P120,000 d. None

Items 15 to 18 are based on the following information>

A bankrupt entity has undergone corporate liquidation. Presented below is its statement of financial
position before the start of liquidation:
Cash P300,000 Accounts payable P100,000
Machinery 500,000 Salaries payable 200,000
Building 1,200,000 Income tax payable 300,000
Loan payable 400,000
Mortgage payable 500,000
 Contributed capital 800,000
Deficit (300,000)

The following additional data are provided:

 Liquidation expenses amounting to p600,000 were paid.
 The loans payable is secured by the machinery which has fair value of P300,000.
 The mortgage payable is fully secured by the building.
 At the end of liquidation, the holder of loan payable received P340,000.

15. What is the recovery percentage of unsecured creditors without priority?

a. 15% c. 60%
b. 85% d. 40%
16. What is the amount received by the holder of accounts payable at the end of liquidation?
a. P85,000 c. P40,000
b. P15,000 d. P60,000
17. What is the amount of net free assets available at the end of liquidation?
a. P80,000 c. P120,000
b. P40,000 d. P200,000
18. What is the fair value or realizable value of building?
a. P880,000 c. P1,300,000
b. P1,380,000 d. P1,100,000

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