Chapter 6

Problem I
1. Statement of Affairs

MINER COMPANY
Statement of Affairs
May 31, 2012

Assets

Book Value

Realizable
Value

P 50,000

Assets Pledged with Fully Secured Creditors:

Notes Receivable

1,200

Accrued Interest Rec.

Notes Payable

P39,800
1,000

P 40,800

40,000
800

40,800

Accrued Interest Pay.

119,000

Building
Note Payable
Accrued Interest Pay.

75,000
20,000
800

20,800

P 54,200

Assets Pledged with Partially Secured Creditors:

13,200
Equipment

4,200
10,000

Note Payable

6,000
61,000
60,000
1,100

Free Assets
Cash
Accounts Receivable
Inventory
Prepaid Insurance
Goodwill

6,000
50,000
30,000
400
0

8,500
Total Net Realizable Value

140,600

Liabilities having Priority Wages

6,000
Taxes

8,400
2,400

Net Free Assets

132,200

Estimated Deficiency to Unsecured Creditors

P 320,000

Book
Value

53,600

P 185,800

Unsecure
d

Equities
Liabilities Having Priority:

P 6,000

P 6,000
Accrued Wages

2,400

2,400

P 8,400

Taxes Payable

60,000
1,600

Fully Secured Creditors:

Notes Payable
Accrued Interest Payable

60,000
1,600
61,600

10,000

Partially Secured Creditors:

10,000

Note Payable
4,200
Equipment

P 5,800

170,000
10,000
110,000
( 50,000)
P 320,000

Unsecured Creditors:
Accounts Payable
Notes Payable

170,000
10,000

Stockholders Equity
Common Stock
Retained Earnings
(Deficit)

P 185,800

2. Deficiency Statement to determine estimated deficiency to unsecured creditors:

Deficiency Account
May 31, 2012

Estimated Losses:

Accounts Receivable

Estimated Gains:

P 11,000

Common Stock

P
110,000

(50,000)

Notes Receivable

10,400

Retained Earnings

Inventory

30,000

Estimated Deficiency to

Buildings

44,000

Unsecured Creditors

Equipment

Prepaid Insurance

Goodwill

53,60
0

9,000

700

8,500

P113,600

P 113,600

Estimated final dividend rate to unsecured creditors is: P132,200/P185,800 = 71.15%

Problem II

1.

Down Dog Corporation

Statement of Affairs
June 30, 2014

Book Value
P165,000

3,000
72,000
60,000

______
P300,000

Assets
Pledged with partially secured creditors
Equipment-net
P87,000
Less: Note payable and accrued interest
(96,000)
Unsecured amount (See below)
(9,000)
Free Assets
Cash
3,000
Accounts receivable-net
48,000
Inventories
72,000
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
P108,000

Deficiency
Account
Realizable Value (Loss/Gain)
P

(24,000)
12,000

______
(90,000)

Unsecured
Equities

Book Value
P 45,000

96,000

72,000
27,000
180,000
(120,000)
P300,000

Priority liabilities
Wages payable (assumed under
P4,650 per employee)
Partially secured creditors
Note payable and accrued interest
Less: Equipment pledged as security

Liabilities

P 45,000
P 96,000
(87,000)

Unsecured creditors
Accounts payable
Rent payable

P 9,000
72,000
27,000

Stockholders equity
Capital stock
Retained earnings (deficit)

______
P108,000

Estimated Deficiency

180,000
(120,000)
P 60,000
P(30,000)

2. 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
Administrative expenses
24,000
Wages payable
45,000
Available to unsecured nonpriority creditors

(156,000)
P 54,000

Note payable and interest (unsecured portion)

Accounts payable
Rent payable
Unsecured nonpriority claims

P 9,000
72,000
27,000
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
Unsecured portion (P9,000 0.50)

P87,000
4,500

P91,500

Unsecured priority
Administrative expenses
Wages payable

P24,000
45,000

69,000

Unsecured nonpriority
Accounts payable (P72,000 0.50
Rent payable (P27,000 0.50)
Total payments

P36,000
13,500

49,500
P210,000

Problem III
Realizable value of all assets (P635,000 + P300,000 + P340,000)P1,275,000
Allocated to:

Fully secured creditors

Partially secured creditors
Unsecured creditors with priority
Remainder available to general unsecured creditors
Payment rate to general unsecured creditors
(Including balance due to partially secured creditors)
P559,000 / (P1,165,000 + (P400,000 - P300,000))
Realizable value of assets:
Assets pledged to fully secured creditors
Assets pledged to partially secured creditors
Free assets
Total realizable value

(316,000)
(300,000)
(100,000)
P559,000

44.2%
P635,000
300,000
340,000
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
*Rounded P130
Problem IV
Free Assets:
Current Assets ..................................................................
Buildings and Equipment .................................................
Total .........................................................................

P 35,000
110,000
P145,000

Liabilities with Priority:

Administrative Expenses ..................................................
Salaries Payable (only P3,000 per employee)...................
Income Taxes ...................................................................
Total .........................................................................

P 20,000
6,000
8,000
P 34,000

Free Assets After Payment of Liabilities with Priority

(P145,000 P34,000) ......................................................

P111,000

Unsecured Liabilities
Notes Payable (in excess of value of security) .................
Accounts Payable .............................................................
Bonds Payable ..................................................................
Total .........................................................................

P 30,000
85,000
70,000
P185,000

Percentage of Unsecured Liabilities To Be Paid: P111,000/P185,000 = 60 %

Payment On Notes Payable:
Value of Security (land) ....................................................
60% of Remaining P30,000 ..............................................
Total Collected by holders ................................................
Problem V
Free Assets:
Cash

.........................................................................

P 90,000
18,000
P108,000

P30,000

Receivables (30 percent collectible)..................................

Inventory .........................................................................
Land (value in excess of secured note:
P120,000 P110,000)..................................................
Total .........................................................................

15,000
39,000
10,000
P94,000

Less: Liabilities with priority

Salary payable (below maximum)...............................
Free assets available...................................................

(10,000)
P84,000

Unsecured Liabilities:
Accounts payable..............................................................
Bonds payable (less secured interest in
building: P300,000 P180,000)...................................
Unsecured liabilities....................................................

P90,000
120,000
P210,000

Percentage of unsecured liabilities to be paid: P84,000/P210,000 = 40%

Amounts to be paid for:
Salary payable (liability with priority to be paid
in full) .........................................................................
Accounts payable (unsecuredwill collect 40%
of debts of P90,000)....................................................
Note payable (fully secured by landwill collect
entire balance)...........................................................
Bonds payable (partially securedwill collect
P180,000 from building and 40 percent of the
remaining P120,000)...................................................

P10,000
P36,000
P110,000
P228,000

Problem VI

Class of Creditors
Fully secured liabilities
Partially secured liabilities
Unsecured liabilities with priority
Unsecured liabilities without priority

Total
Creditors
Claims
183,600
54,600
30,810
182,500

Total
Amounts
Expected to
be
Recovered
183,600
51,720
30,810
116,800

% of Total
Claims
Expected to
be
Recovered
100.0
94.7
100.0
64.0

Problem VII
1.

Total estimated proceeds

Less asset proceeds claimed by secured
creditors:
Notes payable and interest (from
proceeds of receivables and inventory)
Mortgage payable and interest (from
proceeds of land and building)
Total available to unsecured claimants.
Less distributions to unsecured claims
with priority:
Wages payable
Taxes payable

P910,000

P150,000
320,000

P 10,000
20,000

470,000
P440,000

30,000

Amount available for unsecured claims

2.

3.

P410,000

Unsecured portion of notes payable and

interest (P500,000 + P30,000 P150,000)
Accounts payable
Total claims ofunsecured creditors
Dividend to Unsecured Creditors
P410,000 P640,000 = 64.1%

P380,000
260,000
P640,000

Unsecured portion of notes payable and

Interest
Dividend on unsecured amount
Amount received on unsecured portion
Proceeds from receivables and inventory
Total Received

P380,000

64.1%
P243,580
150,000
P393,580

Dividend to note holders: P393,580 P530,000 = 74.3%

Problem VIII
1.

WILBUR CORPORATION
STATEMENT OF AFFAIRS
DECEMBER 31, 2008
Assets
Estimated
Current
Values

Book Value

P 40,000

50,000
110,000

(1) Assets pledged with fully

secured
creditors:
Accounts receivable (net)
Less: 10% note payable and
interest
Land
Plant and equipment (net)
Less: Mortgages payable and
interest

20,000

35,000

4,000
35,000
55,000

(2) Assets pledged with partially

secured creditors:
Marketable securities
Less: 10% note payable and
interest
Inventory
Less: Accounts payable
(3) Free assets:
Cash
Accounts receivable (net)
Inventory

Estimated
Amount
Available to
Unsecured
Claims

Estimated
Gain
(Loss) on
Realizatio
n

P 40,000
38,500

P 1,500

P 65,000
100,000
P165,000
(157,500)

P 15,000
(10,000)
7,500

P 16,000

(4,000)

(20,800)
P 32,000
(60,000)
P 4,000
35,000
50,000

(3,000)

4,000
35,000
50,000

(5,000)

6,000
140,000
48,000

P 543,000

Prepaid insurance
Plant and equipment (net)
Franchises

1,000
60,000
15,000

1,000
60,000
15,000

Estimated amount available

Less: Creditors with priority
Net available to unsecured creditors
Estimated deficiency

P 174,000
(43,000)
P 131,000
45,000

Total unsecured debt

P 176,000

(5,000)
(80,000)
(33,000)

(P
125,000)

2. Percentage to unsecured creditors: P131,000/P176,000 = 74.43%

Problem IX

Assets to be realized
Old Receivebles, net
50,000
Marketable Securities
20,000
Old Inventory
72,000
Depreciable Assets, net
120,000

Smith Company
Statement of Realization and Liquidation
Assets
Assets Realized
P

Old Receivbles
28,000
New Receivbles
65,000
Marketable Securities
15,000
Sales of Inventory
100,000

Assets Acquired

Assets Not Realized

New Receivables
100,000

Old Receivables, net

22,000
New Receivables, net
35,000
Depreciable Assets
96,000

Supplementary Charges
Old Current Payables
31,000

Supplementary Items
Supplementary Credits
P

Liabilities Not Liquidated

Old Current Payables
34,000

Net Loss
7,000

Liabilities
Liabilities to be Liquidated

Liabilities Liquidated
Old Current Payables
31,000

Old Current Payables

P
65,000

Liabilities Incurred
P

_____
___

P43
3,000

P
433,000

Problem X
Mallory Corporation
Statement of Realization and Liquidation
For the Three Months Ended July 31, 20X5
Assets
Assets
Beginning balances assigned 5/1/X5
Cash Receipts:
Collection of Accounts Receivable
Sale of inventory
Sale of land and building
Sale of machinery
Cash Disbursements:
Payment of salaries payable
Partial payment of accounts pay.
Partial payment of bank loan
Ending balance

Assets
Beginning balances assigned
5/1/X5
Cash Receipts:
Collection of Accounts
Receivable
Sale of inventory
Sale of land and building
Sale of machinery
Cash Disbursements:
Payment of salaries payable
Partial payment of accounts
payPartial payment of bank loan
Ending balance

Cash
P 4,000

Non-Cash
P720,000

60,000
170,000
20,000
70,000

Fully
Secured
P240,00
0

(240,00
0)

________
P
0 P

(70,000)
(200,000)
(340,000)
(100,000)

(60,000)
(170,000)
(70,000)
P24,000
P10,000
Liabilities
Unsecured
Partially
With
Without
Owner's
Secured Priority Priority
Equity
P270,00 P94,000
P 0 P120,000
0
(10,000)
(30,000)
(80,000)
(30,000)
(60,000
)
(180,00
10,000
0) ________
(90,000)
20,000
P P34,000 P30,000
0

________
P
(30,000)

Multiple Choice Problems

1. d since there is parent and subsidiary relationship, any intercompany accounts are
eliminated from consolidated point of view.
2. a - [P90,000 + P36,000 + P10,000 P45,000 = P91,000 total estimated amount
available; P91,000 (P4,500 + P10,000) = P76,500 estimated amount available for
unsecured, non-priority creditors; P76,500 P90,000 = 0.85]
3. c it is a partially secured liability

4. d [(P1,110,000 P780,000) + P960,000] P210,000 = P1,080,000

5. b P25,000 + [.30 x (P75,000 P25,000)] = P40,000

6. d (P555,000 P390,000) + P480,000 = P645,000 P105,000 = P540,000

7. b P30,000 + [.30 x (P90,000 P30,000)] = P48,000

8. d

9. No requirement

10. c P60,000 + [(P120,000 + P6,000) (P30,000 + P35,000) = P121,000

11. b - P20,000 + P80,000 + [P170,000 (P150,000 + P7,000)] = P113,000 (P10,000 +

P10,000)
= P93,000

12. c P93,000/P121,000 = 77% rounded.

13. a
Net Free Assets:
(P700,000 P300,000) + P70,000 + P230,000 = P700,000 P140,000 = P560,000
Total Unsecured Creditors without priority:
(P400,000 P300,000) + P600,000 = P700,000

14. c

Statement of Realization and Liquidation

Assets to be Realized.
Assets Acquired..
Liabilities Liquidated.
Liabilities Not Liquidated.
Supplementary charges/
debits

P 1,375,000
750,000
1,875,000
1,700,000

Assets Realized..P 1,200,000

Assets Not Realized 1,375,000
Liabilities to be Liquidated.
2,250,000
Liabilities Assumed..
1,625,000
Supplementary credits
2,800,000

3,125,000
P 8,825,000

P 9,250,000

Net Gain.. P 425,000

15. c
Total Liabilities (refer to Liabilities not liquidatedNo. 14) P1,700,000
+: Stockholders Equity (P1,500,000 P500,000) 1,000,000
Total LSHE = Total Assets P 2,700,000
-: Noncash assets (refer to Assets not realized-No. 14). 1,375,000
Cash balance, ending P1,325,000

Theories
1
.

False

6.

False

11
.

False

16
.

21
.

26.

31
.

2
.
3
.
4
.
5
.

False

7.

True

False

9.

True

False

10
,

True

32
.
33
.
34
.
35
.

True

27
.
28
.
29
.
30
.

True

22
.
23
.
24
.
25
.

8.

17
.
18
.
19
.
20
.

False

12
.
13
.
14
.
15
,

36.

41.

46.

37
.
38
.
39
.
40
.

42
.
43
.
44
.
45
.

47
.
48
.
49
.
50
.

b
c
d

b
d
c

c
a
d

a
a
c

b
b
b

b
d
b

b
c
b

a
c
c