lOMoARcPSD|4622027

Exam in taxation

Business Tax (Naga College Foundation)

StuDocu is not sponsored or endorsed by any college or university

Downloaded by Rusell Jhean Dabatos ([email protected])
 lOMoARcPSD|4622027

CORPORATE LIQUIDATION

1.) Quinte Company has become insolvent and a Statement of Affairs is being prepared. The following
data were taken from the Statement of Affairs:

ASSETS
Pledged with Fully secured creditors P71,000
Pledged with Partially secured creditors 12,500
Free assets 11,000

LIABILITIES
Partially secured P20,000
With priority 3,000
Fully secured 60,000
Unsecured without priority 18,000

What is the ESTIMATED DEFICIENCY to UNSECURED CREDITORS?

a. P12,500
b. P15,500
c. P5,000
d. P6,500

2. & 3.) Items 2 & 3 are based on the following data:

The trustee of Nalugina Corporation provided the following data about the Company’s financial
position:

BOOK VALUE ESTIMATED REALIZABLE

VALUE
Cash P20,000 P20,000
Accounts
Receivable-net 100,000 75,000
Inventories 150,000 70,000
Plant assets-net 250,000 260,000
TOTAL 520,000

Preferred
Creditors P70,000
Accounts Payable 150,000
(unsecured)
Notes Payable 100,000
(secured by Accounts Receivable)
Mortgage Payable 200,000
(secured by all Plant assets)
TOTAL P520,000

In the event of liquidation:

What is the ESTIMATED AMOUNT available to UNSECURED CREDITORS WITHOUT PRIORITY?

a. P 85,000
b. P 80,000
c. P 90,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

d. P 175,000

What is the ESTIMATED DEFICIENCY in the payment of creditors?

a. P175,000
b. P 80,000
c. P 95,000
d. P 90,000

4.) The following data were taken from the Statement of Realization and Liquidation of Maurin
Corporation for the three month period ended December 31, 2008:

Assets to be realized P55,000

Assets acquired 60,000
Assets realized 70,000
Assets not realized 25,000
Liabilities to be liquidated 90,000
Liabilities assumed 30,000
Liabilities liquidated 60,000
Liabilities not liquidated 75,000
Supplementary credits 85,000
Supplementary charges 78,000

What is the NET INCOME (loss) for the period?

a. P28,090
b. (P28,000)
c. (P35,000)
d. P 7,000

5.) A Statement of Realization and Liquidation of Nino Jay Corporation has been prepared. Totals
therefrom are as follows:

Assets to be realized P 80,000

Assets acquired 40,000
Assets realized 30,000
Assets not realized 90,000
Liabilities to be liquidated 80,000
Liabilities assumed 50,000
Liabilities liquidated 100,000
Liabilities not liquidated 30,000
Supplementary credits 110,000
Supplementary charges 98,000

The ending balances of capital stock and retained earnings are P100,000 and P18,000 respectively

How much was the ENDING BALANCE of CASH?

a. P 35,000
b. P 45,000
c. P 58,000
d. P 59,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

6.) Russel Co. filed a voluntary bankruptcy petition on August 15, 2008 and the statement of affairs
reflects the following amounts:

Book value Estimated

Current
Value
Assets:
Assets with P300,000 P370,000
fully secured creditors
Assets with 180,000 120,000
partially secured creditors
Free assets 420,000 320,000
P900,000 P810,000

Liabilities:
Liabilities P70,000
with priority
Fully secured creditors 260,000
Partially secured creditors 200,000
Unsecured creditors 540,000
P1,070,000

How much was the NET FREE ASSETS?

a. P 335,000
b. P 445,000
c. P 365,000
d. P 360,000

7.) Sheila May 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 P6, 000,000. The car has a book value of P8,000,000 and a net
realizable value of P4,000,000. The unsecured creditors of Sheila May and Co. can expect to receive
50% of their claims period in the liquidation, the bank that holds the note on the Cadillac should
receive:

a. P6,000,000 c. 4,000,000
b. 5,000,000 d. 3,000,000

8.) The following data are provided by the Aiyannah Company

Assets at book value P150,000

Assets of net realizable value 105,000
Liabilities at book value:
Fully secured mortgage 60,000
Unsecured accounts and notes payable 70,000
Unrecorded liabilities:
Interest on bank notes 500
Estimated cost of administering estate 6000

The court has appointed a trustee to liquidate the company.

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

The journal entry made by the trustee to record the assets and liabilities should include an estate
deficit of:
a. 31,500
b. 31,000
c. 25,500
d. 25,000

9.) Using the same information in number 8, the statement of affairs prepared by the trustee at this time
should include an estimated deficiency to unsecured creditors of:
a. 45,000
b. 39,000
c. 31,500
d. 25,000

10.) On December 18, 2011 the statement of affairs of Jammy Company which is in bankruptcy
liquidation included the following:

Assets pledged for fully secured liabilities P100,000

Assets pledged for partially secured liabilities 40,000
Free assets 120,000
Fully secured liabilities 80,000
Partially secured liabilities 50,000
Unsecured liabilities with priority 60,000
Unsecured liabilities without priority 90,000

Compute the estimated amount to be paid to:

Fully unsecured partially unsecured

Secured liabilities secured liabilities
Liabilities w/priority liabilities w/o priority
a.P80,000 P60,000 P50,000 P70,000
b.64,000 60,000 48,000 88,000
c.80,000 48,000 60,000 72,000
d.80,000 60,000 48,000 72,000

11.) The creditors if the CBT Corporation agreed to a liquidation based on the statement of affairs
suggested that unsecured creditors, without priority would receive approximately P.60 on the peso.
The unsecured creditors are interested in determining whether the preliminary estimate still seems
appropriate. The trustee was originally assigned noncash assets of P1,480,000 and creditors’ claims
as follows: fully secured 670,000; partially secured P400,000; unsecured with priority P200,000; and
unsecured without priority, P320,000. Assets with a book value of 45,000 and unsecured liabilities
(without priority) of 35,000 were subsequently discovered. Assets with a total book value of
P740,000 were sold for P715,000 net fully secured liabilities of P410,000 and partially secured
liabilities of P280,000 were paid. Remaining liquidation expenses were estimated to be P30,000.

Assume the remaining noncash assets have an estimated net realizable value as follows:

Assets traceable to fully secured creditors P240,000

Assets traceable to partially secured creditors 110,000
Free assets 382.000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

Determining the revised estimate of the dividend to be received by unsecured creditors without priority:
A. 100%
B. 66.17%
C. 45.97%
D. Cannot be determined

12.) Debeethoven Corporation 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 is 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 three-month period ending March 31 is:
A. P250,000
B. (325,000)
C. P425,000
D. 750,000

13.) Using the same information on number 12, compute the ending cash balance of cash account
assuming that common stock and deficits are P1,500,000 and P500,000 respectively.
A. P425,000
B. P575,000
C. P1,325,000
D. P1.375,000

14.) Karent Company had severe financial difficulties and is considering the possibility of liquidation. At
this time, the company has the following assets (stated at net realizable value) and liabilities.

Assets (pledged against debts of P70,000) P116,000

Assets (pledged against debts of P130, 000) 50,000
Other assets 80,000
Liabilities with priority 42,000
Unsecured creditors 200,000

In liquidation, how much would be paid to the partially secured creditors?

a. P130,000
b. P50,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

c. P74,000
d. P200,000

15.) Fulgencio 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 2 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
Bldg. & equipment 100,000 110,000

How much will the holders of notes payable collect following the liquidation?
a. P 108,000
b. P 83,000
c. P 90,000
d. P 120,000

16.) The Gallardo Company owes P 200,000 on a note payable plus P 8,000 in interest to its bank. The
note is secured by inventory with a book value of P 160,000 and a fair value of P 120,000. What
amount will the bank received if unsecured creditors receive 75% of their claims?
a. P 120,000
b. P 160,000
c. P 180,000
d. P 186,000

17.) Pascual Company has been forced into bankruptcy and liquidated. Unsecured claims will be paid at
the rate of P 0.50 on the peso. Barber Co. holds a non- interest bearing note receivable from Pascual Co.
in the amount of P 50,000, collateralized by machinery with liquidation value of P 10,000. The total
amount to be realized by Barber Co. on this note receivable is
a. P 35,000
b. P 30,000
c. P 25,000
d. P 10,000

18.) A review of the assets and liabilities of the MauMau Company, in bankruptcy on June 31, 2011,
discloses the following:
 A mortgage payable of P 350,000 is secured by land and buildings valued at P 560,000
 Notes payable of P 175,000 are secured by equipment valued at P 140,000
 Assets other than those referred to, have an estimated value of P 157,500
 Liabilities other than those referred to, total P 420,000, which included claims with priority of
P 52,500.

What is the estimated deficiency to unsecured creditors?

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

a. P 87,500
b. P 35,000
c. P 402,500
d. P 315,000

19. to 31.) Kelvin Company has decided to seek liquidation after previous restructuring and quasi-
reorganization attempts failed. The company has the following condensed balance sheet as of May 1,
2011:

ASSET
Cash P 12,000
Receivable (net) 280,000
Inventory 70,000
Prepaid expenses 1,000
Plant assets 300,000
Goodwill 39,000
Total P702,000

LIABILITIES AND STOCKHOLDER’S EQUITY

Accrued Payroll P 40,000
Loans from officer 50,000
Accounts payable 60,000
Equipment loans payable 360,000
Business loan payable 180,000
Common Stock 60,000
Deficit (48,000)
Total P702,000

The equipment loan payable is secured by specific 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 the 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 has a realizable
value of P150,000.

19. Assuming trustee expenses of P12,000 in addition to recorded liabilities, which of the remaining
unsecured creditors has the next highest order of priority.
a. Accrued payroll c. Loan from officer
b. Equipment loan payable d. Business loan payable

20. The realizable value of assets pledged with fully secured creditors is:
a. P459,000 c. P40,000
b. P44,000 d. P489,000

21. Of those creditors who are partially secured, their unsecured amounts are:
a. P430,000 c. P540,000
b. P110,000 d. P120,000

22. The total realizable value of free assets to unsecured creditors before unsecured creditors with priority
is:
a. P628,000 c. P220,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

b. P232,000 d. P198,000

23. The dividend to unsecured creditors or the expected recovery percentage of unsecured creditors
(rounded) is:
a. 90% c. 88%
b. 100% d. 76%

24. Estimated deficiency to unsecured creditors is:

a. P 0 c. P2,000
b. P22,000 d. P12,000

25. Estimated loss on asset disposition is:

a. P51,000 c. P51,000
b. P 89,000 d. P90,000

26. Estimated gain as asset disposition is:

a. P56,000 c. P52,000
b. P54,000 d. P 6,000

27. Estimated amount paid to unsecured creditors with priority is:

a. P10,000 c. P40,000
b. P30,000 d. P110,000

28. Estimated amount paid to fully secured creditors is:

a. P40,000 c. P470,000
b. P390,000 d. P430,000

29. Estimated amount paid to unsecured creditors without priority is:

a. P70,000 c. P20,000
b. P61,600 d. P50,000

30. Estimated payment to partially secured creditors is:

a. P358,000 c. P168,000
b. P526,800 d. P430,000

31. Estimated payment to creditors is (discrepancy is expected due to rounding off)

a. P580,000 c. P571,000
b. P659,600 d. 668,400

MULTIPLE CHOICE PROBLEMS: KEY TO CORRECTIONS

1.) D. P6,500
2.) B. P80,000
3.) C. P95,000
4.) B. (P28,000)
5.) C. P58,000
6.) D. 360000
7.) B. 5,000,000
8.) C. 25,000
9.) C. (31,500)

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

10.) D. 80,000-60,000-48,000-72,000
11.) C. 45.97%
12.) C. 425,000
13.) C. 1,325,000
14.) C. 74,000
15.) A. P108,000

16.) D. 186,000
17.) B. 30,000
18.) B. 35,000
19.) A. Accrued Payroll
20.) B. 44,000
21.) B. 110,000
22.) D. 198,000
23.) C. 88%
24.) B. 22,000
25.) D. 90,000
26.) A. 56,000
27.) C. 40,000
28.) A. 40,000
29.) B. 61,600
30.) B. 526,800
31.) D. 668,400

32. – 34.) Rocket Bunny Corp. is experiencing financial difficulty and is in the process of liquidation. In
its statement of financial position, the mortgage payable of P110, 000 is secured by the land with carrying
amount of P100, 000 and fair market value of P105, 000. Accrued expenses total P15, 000 of which P10,
000 represents salaries of employees and the remainder is secured by the inventory with statement of
financial position amounting to P132, 000. Estimated payment to partial creditors is P108, 250. The
amount of total assets is P135, 000.

32. How much is the estimated recovery percentage?

A. 60%
B. 65%
C. 70%
D. 75%
33. How much is the estimated deficiency?
A. 4,200
B. 3,600
C. 3,000
D. 4,800
34. How much is the payment to unsecured creditors without priority?
A. 4,900
B. 5,250
C. 4,200
D. 4,550

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

SOLUTION:

PFSC PPSC

10 105

FA

12.8

FSC PSC

5 110 – 105 = 5

W/P W/O

10 7

Total payment to PSC 108,250

PPSC 105,000
Bal. 3,250
÷ 5,000
Estimated Recovery 65%

Without priority 12,000

× 65%
Net free assets 7,800

W/out priority 12,000

Less: NFA (7,800)
Estimated deficiency 4,200

Unsecured creditors 7,000

× 65%
Payment to unsecured
creditors w/out priority 4,550

35.) The accountant of Eternal Corp. prepared a statement of affairs. Assets which there are no claims or
liens are expected to produce P700, 000. Unsecured of all classes totalled to P1, 050,000. The following
data are claims deemed outstanding:

a) Accrued Salaries, P15,000

b) Unrecorded notes for P10, 000, on which P600 of interest has accrued held by Everlasting Co.

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

c) A note for P30, 000 secured by P40, 000 receivable, estimated to be 60% collectible held by
Jones Co.
d) A P15, 000 note, on which P300 interest has accrued held by Jay 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.
e) Unpaid income taxes of P35,000
What is the amount realized by partially secured creditors?

a. 10,600
b. 19,500
c. 24,900
d. 27,900
SOLUTION:

Total Free Assets P700, 000

LESS: Unsecured claims with priority:
Accrued salaries P15, 000
Unpaid income taxes 35,000 50,000
NET FREE ASSETS P650, 000
Divide by total unsecured claims without
Priority:
Total Unsecured claims of all classes
(With or without priority) P1, 050,000
LESS: unsecured claims with
Priority (accrued salaries and
Unpaid taxes) 50,000 P1,000,000
% of Recovery 65%
Realizable Amount of accounts receivable
(60%*P40, 000) P24, 000
ADD: unsecured portion
[(P30, 000-24,000)*65%] 3,900
Amount realized by partially secured creditors P27,900

36. – 41.) The following data were taken from the statement of affairs for AL Company:

Asset pledged for fully secured creditors P90, 000

(Fair Value P80, 000)
Asset pledged for partially secured creditors 85,000
(Fair Value P55, 000)
Free Assets (Fair Value P40, 000) 70,000
Unsecured Liabilities with priority 7,000
Fully secured liabilities 30,000
Partially secured liabilities 60,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

Unsecured liabilities without priorities 112,000

REQUIREMENTS:
36. Total Free Assets
37. Net Free Assets
38. Total Unsecured Liabilities
39. Estimated Deficiency to Unsecured Creditors
40. Expected Recovery Percentage
41. How much will be paid to each of the following:
a. Unsecured liabilities with priority
b. Unsecured liabilities without priority

SOLUTION:

37. Free Assets 40,000

Add: Excess
(80,000-30,000) 50,000
Total free assets 90,000

38. Total free assets 90,000

Less: Unsecured
Liabilities with priority 7,000
Net free assets 83,000

39. Unsecured Liabilities with priority 7,000

Unsecured Liabilities without priority 117,000
Total Unsecured Claims 124,000

40. Net free assets 83,000

Less: Unsecured without priority 117,000
Estimated Deficiency (34,000)

Net Free Assets

41. Recovery Percentage = Unsecured liabilites wit h out
priority

83,000
= = .71 or 71%
117,000

42. A. Unsecured liabilities with priority can recover the full amount of 7,000
B. Unsecured liabilities without priority can recover 83,070.

Total unsecured liabilities without priority 117,000

x Recovery Percentage 71%

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

Will be paid 83,070

43. – 45). Aila Gorgeous Company recently petitioned for bankruptcy and is now in the process of
preparing a statement of affairs. The carrying values and estimated fair values of the assets of Aila
Gorgeous Company are as follows:

Debts of Aila Gorgeous are as follows:

43. Based on the preceding information, what is the total amount of unsecured claims?
A. $113,000
B. $126,000
C. $93,000
D. $121,000

44. Based on the preceding information, what estimated amount will be available for general unsecured
creditors upon liquidation?
A. $28,000
B. $93,000
C. $113,000
D. $121,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

45. Based on the preceding information, what is the estimated dividend percentage?
A. 23 percent
B. 93 percent
C. 77 percent
D. 68 percent

SOLUTION:

170,000.00 65,000.00

20,000.00

80,000.00

157,000.00 126,000.00

10,000.00 60,000.00

10,000.00

(121,000.00
93,000.00 )

77%

In 2014, Camel Corp. was forced into bankruptcy and begun to liquidate. The following selected account
balances were taken from its statement of affairs:

Asset pledged with partially secured creditors,

Book Value P80, 000 Estimated Current Value P50, 000
Total Free Asset,
Book Value P220, 000 Estimated Current Value P160, 000
Preferred Claims,
Book Value P16, 000 Estimated Current Value 0
Partially secured liabilities
Book Value P75, 000 Estimated Current Value P25, 000
Unsecured Liabilities
Book Value P155, 000 Estimated Current Value P155, 000

46). What is the total amount available for payment of claims of unsecured creditors?

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

a. 0
b. 144,000
a. 160,000
b. 210,000
47.) What is the estimated amount of liquidating dividend per peso claim (rounded to the nearest
centavo)?

a. 0.80
b. 0,88
c. 1.03
d. 1.17
48.) What is the amount estimated deficiency to creditors?

a. 180,000
b. 160,000
c. 144,000
d. 36,000
SOLUTION:

46.) B.144, 000

Estimated current value of free assets P160,000

LESS: preferred claims 16,000
Total amount available to unsecured creditors P144,000

47.) A. P0 .80

Estimated current value of free assets P160,000

LESS: preferred claims 16,000
Total amount available to unsecured creditors P144,000
Divide by total unsecured liabilities
(155,000+25,000) 180,000
Estimated amount of liquidating dividend per peso claim 0.80

48.) D. 36,000

Total amount available to unsecured creditors P144,000

LESS: Total unsecured liabilities (155,000+25,000) 180,000
Deficiency to creditors P36,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

49). Louis Company experiences financial difficulties and is considering the possibility of liquidation.
The company has the following assets and liabilities.

Net Realizable Value Book Value

Assets (pledged against liabilities of P 80,000) P115,000 120,000

Assets (pledged against liabilities of P 140,000) 100,000 150,000
Other assets 70,000 50,000
Liabilities w/ priority 40,000
Unsecured creditors 85,000

How much will be paid to the partially secured creditors?

SOLUTION:

Fully pledged assets P 115,000

Less: fully secured liabilities 80,000
Excess 35,000
Add: Free assets 70,000
Total assets 105,000
Less: liab w/ priority 40,000
Net free assets 65,000

Unsecured liabilities:
Partially secured liabilities
(Unsecured portion 140,000-100,000) P 40,000
Unsecured creditors 85,000
Total 125,000

Estimated recovery rate 65,000/125,000= 52%

Secured portion 100,000

Unsecured portion (40,000 x 52%) 20,800
Total payment P 120,800

38. Bee Company owes P300, 000 in notes plus P12,000 interest to its bank. The note is collaterized by
the company’s inventories with book value of P240,000 and fair value of P180,000.

What amount would the bank received if unsecured creditors receive 75% of their claims?

Answer: P279,000

SOLUTION:

Assets Partially pledged

Inventories P180,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

Less: Liabilities to partially secured creditors

Notes Payable P300,000

Interest _ 12,000__ _ 312,000__

Unsecured liabilities without priority P132,000

Net free assets

Estimated Percentage =
unsecured wit h out priority

?
75 % =
132,000

= P99,000

Received:

(P132, 000 x 75%) + 180,000 = P279,000

39. Butete Inc. owes the Pecky Corporation P60,000 on account, which is secured by accounts receivable
with a book value of P50,000. The unsecured portion is considered a claim under the bankruptcy law,
Butete has filed for bankruptcy. Its statement of affairs lists the accounts receivables securing the Pecky
Corporation with an estimated residual value of P45,000. If the dividend to general unsecured creditors is
80%, how much can Pecky expect to receive?

a. 60,000
b. 58,000
c. 57,000
d. 48,000
Answer: C

SOLUTION:

The P60, 000 owes to Pecky is considered a partially secured liabilities. Accounts receivable with a
realizable value of 45,000 is pledged to secure the liability. Therefore, the estimated amount to be paid to
Pecky Corporation would be as follows:

A/R at NRV P45,000

Add: Free Assets used to

Pay the unsecured amt:

(P60, 000 – P45, 000) x .80 __12,000

Est. Amt to be paid to partially

Secured liabilities __57000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

50). When the Makiling Company filed for liquidation with Securities and Exchange Commission, it
prepared the following statement of financial position:

ASSETS: LIABILITIES AND EQUITY

Current assets P 80,000 Accounts payable P 160,000

Land and Building 200,000 Mortgage payable 200,000
Goodwill 40,000 Common stock 100,000
Retained earnings (140,000)
TOTAL ASSETS P 320,000 TOTAL LIABILITIES AND P 320,000
EQUITY

Additional information:

The current assets and land and building have a net realizable value of P50,000 and 240,000 respectively.
The mortgage payable is secured by land and building.

Required:

What percentage of their claims are the unsecured creditors expected to get?

Solution:

Recovery percentage:

Net free assets / Claims to unsecured creditors

= 90,000/160,000 = 56.25%

51.) PaVaBa Co. is insolvent and its statement of affairs shows the following information:

Estimated gains on realization of assets ………… P 1,440,000

Estimated losses on realization of assets ………… 2,000,000
Additional assets ………… 1,280,000
Additional liabilities ………… 960,000
Capital stock ………… 2,000,000
Deficit ………… 1,200,000

The pro-rate payment on the peso to stockholders (estimated amount to be recovered by stockholders) is:

SOLUTION:

Estimated losses on realization of assets P 2,000,000

Less: Estimated gains on realization of assets P 1,440,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

Additional assets 1,280,000 2,720,000

Estimated net (gain) or loss in asset realization P( 720,000)
Add: Additional liabilities 960,000
Estimated net (gain) or loss P 240,000
Less: Stockholders’ equity:
Capital Stock P 2,000,000
Deficit 1,200,000 800,000
Estimated amount to be recovered by stockholders P 560,000

Therefore, the pro-rate payment on the peso is:

Estimated amount to be recovered by stockholders P 560,000

Stockholders’ Equity P 800,000
= P .70

52.) The Nah Lugi Corporation has decided to seek liquidation after restructuring attempts failed. The
Corporation has the following condensed balance sheet as of July 31, 2015:

ASSETS LIABILITIES and STOCKHOLDERS’

EQUITY
Cash 15,000 Accrued Payroll 40,000
Receivables (net) 280,000 Loans from officer 60,000
Inventory 70,000 Accounts Payable 80,000
Plant Assets 350,000 Equipment Loan Payable 390,000
Goodwill 40,000 Business Loan Payable 150,000
Common Stock 75,000
Deficit (40,000)
Total P 755,000 Total P 755,000

The equipment loan payable is secured by plant asset having a book value of 350,000 and a realizable
value of 380,000. Of the accounts payable, 40,000 is secured by inventory which has a cost of 40,000 and
a liquidation value of 44,000. The balance of the inventory has a realizable value of 32,000. Receivables
with a market value and book value of 50,000 and 100,000 respectively have been pledged as collateral
on the business loan payable. The balance of the receivables has a realizable value of 150,000.

1. The total realizable value of free assets to unsecured creditors before unsecured creditors with
priority is:

a. P 106,000 c. P 241,000
b. 755,000 d. 201,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

2. Estimated Deficiency to unsecured creditors is:

a. P -0- c. P 49,000
b. 9,000 d. 5,000

3. The expected recovery percentage of unsecured creditors is: (rounded)

a. 96% c. 77%
b. 100% d. 85%

4. Estimated amount paid to unsecured creditors without priority is:

a. P 161,700 c. P 84,700
b. 96,000 d. 77,000
5. Estimated payment to partially secured creditors is:

a. P 84,700 c. P 514,700
b. 540,000 d. 110,000

SOLUTIONS:

Fully Secured Assets: Partially Secured Asset:

Accounts Payable 40,000 Equipment Loan Payable 390,000
Inventory (44,000) Plant Asset (380,000)
Excess P 4,000 P (10,000)
Free Assets Assets Acquired:
Cash 15,000
Receivable (bal) 150,000
Inventory 32,000
Excess 4,000
Total Free Assets P 201,000

Liabilities with priority: Partially Secured Creditors:

Equipment Loan Payable 390,000
Accrued Payroll 40,000 Plant Asset (380,000)
Balance (10,000)

Business Loan Payable 150,000

Receivables 50,000
Balance P (100,000)
Fully Secured Creditors: Unsecured Creditors without priority:
Accounts Payable 40,000 Balance of partially secured 110,000
Inventory (44,000) Loan from Officer 60,000
Excess P 4,000 Accounts Payable (bal) 40,000
Total P 210,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

1. D. – The total free assets before deducting creditors with priority

2. C. (201,000 – 40,000) = 161,000 (Net Free Assets) – 210,000 = (49,000)
3. C. ( Net Free Assets / Unsecured Creditors without Priority) (161,000/210,000) = 76.6666% or
77%
4. D. (60,000 + 40,000 * 77%) = 77,000
5. C. ( total partial payment + bal * recovery percentage)
(430,000 + (110000 * 77%))

53.) A review of the assets and liabilities of J Company in bankruptcy on July 30, 2015 discloses
the ff:

a. A mortgage payable of P118,000, is secured by building valued at P39,000 less than its
book value of P172,000.
b. Notes payable of P57,000 is secured by furniture and equipment with a book value of
P76,000 that is 3/5 realizable.
c. Assets other than those referred to have an estimated value of P44,000, an amount that
is 75% of its book value
d. Liabilities other than those referred to total P91,000, which included claims with priority
of P23,000.

How much was paid to the partially secured creditors?

Solution:

Assets Free Portion < Liabilities Unsecured Priority Deficiency

APFSC-FSC 15,000 < PSC-APPSC 11,400
Unpledged Assets 44,000 < Unsecured Creditors 68,000
< Priority Creditors 23,000
Total Free Assets 59,000 < 79,400 23,000 (43,400)
Squeeze
Recovery Rate = Available Assets / Unsecured Creditors
Recovery Rate = (59-23) / 79.4
Recovery Rate =0.45
Fully Secured Creditors = 100% of amount owed FSC
118,000
Priority Creditors = 100% of amount owed to Priority Creditors
23,000
Partially Secured Creditors = 100% of APPSC + ((PSC-APPSC) x Rec. Rate)
50,769
Unsecured Creditors = 100% of amount owed to Unsecured Creditors x Rec. Rate
30,831

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

54.) Hopia Co. purchased a Cadillo automobile with a little cash down and signed a note, secured by the
Cadillo, for 48 easy monthly installments. When the company files for bankruptcy, the balance due on the
Cadillo amount to P6,000,000. The car had a book value of P8,000,000 and a net realizable value of
P4,000,000. The unsecured creditors of Hopia Co. can expect to receive 50 percent of their claims. In the
liquidation, the bank that holds the note on the Cadillo should receive:

a. P6,000,000 c. P4,000,000

b. 2,000,000 d. 5,000,000

Answer: D

Car-Cadillo, at net realizable value…………………………………………P4,000,000

Add: Portion of free assets used to pay unsecured amount:

(P6,000,000-P4,000,000)x50%.................................................................. 1,000,000
P5,000,000 (D)

55.) A trustee has been appointed by SEC for ABU Inc., which is being liquidated. The following
transactions occurred after the assets were transferred to the trustee:

a. Sales on account by the trustee were P75,000. Cost of goods sold were P60,000, consisting of all
the inventory transferred from ABU.
b. The trustee sold at P12,000 worth of marketable securities for P10,500.
c. Receivables collected by the trustee:
Old: P21,000 of the P38,000 transferred
New: P47,000
d. Recorded P16,000 depreciation on the plant assets of P96,000 transferred from ABU
e. Disbursements by the trustee:
Old current payables: P22,000 of the P48,000 transferred
Trustee’s expenses: P4,300

In the statement of realization and liquidation of ABU Inc.

1. How much are the total assets to be realized:

Old receivable (net) P 38,000
Marketable securities 12,000
Old inventory 60,000
Depreciable assets- net 96,000
Total assets to be realized P206,000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

2. How much is the total assets realized:

Old receivable P 21,000
New receivable 47,000
Marketable securities 10,500
Sales of inventory 75,000
Total asset realized P153,500

3. How much is the net gain (loss):

Gain on sale of inventory (P75,000 – 60,000) 15,000
Loss on realization:
Marketable securities (12,000 – 10,500) 1,500
Trustee’s expenses 4,300
Depreciation 16,000 (21,800)
Net loss P( 6,800)

56.) The trust for Ardolio Inc. prepares a statement of affairs which shows that unsecured creditors whose
claims total P60,000 may expect to receive approximately P36,000 if assets are sold for the benefit of
creditors.

 Michael is an employee who is owed P750.

 Meldcan holds a note for P1,000 on which interest of P50 is accrued; nothing has been pledged
on the note.
 Compboy holds a note of P6,000 on which interest of P300 is accrued; securities with a book
value of P6,500 and a present market value of P5,000 are pledged on the note.
 Serpor holds a note for P2,500 on which interest of P150 is accrued property with a book value of
P2,000 and a present market value of P3,000 is pledged on the note.
How much may each of the following creditors hope to receive?

Michae Meldca Compbo

l n y Serpor
a) PHP 0 PHP 0 PHP 0 PHP 0
b) 90 0 6,300 2,390
c) 350 1,050 5,780 0
d) 750 630 5,780 2,650

Ans: D

Michael’s salary is an unsecured with priority, therefore he receives the full amount

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

Meldcan: P1,050 x (P36,000 / P60,000) = P630

Compboy: P5,000 + (P6,300 – P5,000) x 60% = P5,780

Serpor: Fully secured creditor, receive (P2,500 + P150) = P2,650

57.) SPRING LIFE Co.’s Financial Statement June 30, 2014 shows the ff.

Additional Information:

 P12,000 of Accounts Receivable can still be collected

 P12,000 of Inventory can still be sold
 Land and Building can still be sold P 150,000 and P 80,000 respectively
 The Accounts Payable is secured by equipment; Mortgage Payable is secured by land and
building
 Equipment can only be sold for P32,000
 Notes Payable has unpaid interest of P2,400
 Accrued Expenses include unpaid wages and government taxes
 Administration Expenses of P12,500 are estimated if liquidation happen

Determine the ff.

1. Estimated deficiency to unsecured creditors

2. Total Free Assets
3. Net Free Assets
4. Total Unsecured Creditors Claim
5. Expected recovery percentage
6. Payment to the ff.
 Mortgage Payable
 Accounts Payable

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

 Unsecured Creditors w/o priority

 Unsecured Creditors w/ priority

Answers:

1. P64,900
2. P116,000
3. P85,500
4. P180,900
5. 57%
6. Payment
 Mortgage PayableP150,000
 Accounts PayableP82,160 <32,000 + (88,000*57%)>
 w/o priority P35,568 <62,400*57%>
 w/priority P30,500

Solution:

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

58.) The following data were taken from the statement of affairs of Paminta Company:

Estimated Liabilities with priority…………………………………………………. P122,500

Stockholders’ equity……………………………………………………………………… 441,000

Estimated liquidation expense-unrecorded……………………………………….55,125

Unsecured liabilities without priority……………………………………………1,102,500

Loss on realization of assets…………………………………………………………….551,250

How much is the total free assets?

a. 1,059,625
b. 937,135
c. 992,250
d. 953,575

Solution:

Unsecured liabilities without priority P1,102,500

Loss on realization of assets 551,250

Estimated liquidation expenses-unrecorded 55,125

Stockholders’ equity (441,000)

Unsecured Liabilities with priority 122,500

Total free assets P1,059,625

59.) The accountant of ABC Corp. provides the following data before liquidation:

Estimated gain on realization of assets:

Land 98,750

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

Estimated loss on realization of assets:

Inventories 45,255

Prepaid Expenses 27,687

Machinery 108,632

Goodwill 12,500

Unrecorded claims:

Estimated Administrative expenses 25,585

Contingent Liabilities 37,000

Stockholder’s equity, per books

Capital Stock 330,000

APIC 22,000

Retained Earnings (236,159)

How much is the estimated deficiency to unsecured creditors?

Solution:

Estimated Net Loss in realization of Assets:

Estimated Gain 98,750

Estimated Losses (45,255+27,687+108,632+12,500) 194,074 95,324

Add: Estimated Administrative expenses 25,585

Contingent Liabilities 37,000

Total 157,909

Less: Stockholders’ Equity (330,000+22,000-236,159) 115,841

Estimated deficiency to unsecured creditors 42,068

60.) The following are presented by Fix company:

Assets at NRV P900 000

Liabilities at book value :

Fully secured mortgage 450 000

Downloaded by Rusell Jhean Dabatos ([email protected])

 lOMoARcPSD|4622027

Unsecured accounts payable 500 000

Unrecorded Liabilities:

Estimated administrative expense 20 000

What is the estimated deficiency to unsecured creditors?

Assets at NRV 900 000

Fully secured liab (450 000)

Liab with priority (20 000)

Estimated amount available 430 000

Less: unsecured claims (500 000)

Estimated deficiency to unsecured creditors P70 000

Downloaded by Rusell Jhean Dabatos ([email protected])