1

CHAPTER 14
SUGGESTED ANSWERS
EXERCISES

Exercise 14 - 1

Book Appraised Est. Amount Loss (Gain) on

Value Assets Value Available Realization
Free assets:
P44,000 Finished goods P49,000 P49,000 (P 5,000)
33,000 Work in process:
Est. value upon completion P70,000
Costs to complete:
Materials (10,000)
labor and other costs (17,000) 43,000 43,000 (10,000)
40,000 Materials
Required to complete WIP P10,000
Balance, est. to realize 27,000 37,000 37,000 3,000

Exercise 14 - 2

When there are mutual debts between a bankrupt and a creditor, one balance is set off against the other and
only the difference is recognized for purpose of settlement. Therefore:

(1) Under the heading "Unsecured Creditors", the cash in the savings account with AB Bank,
P7,000, will be applied against the cash overdraft in the checking account with AB Bank,
P9,000, and the overdraft excess of P2,000 will be extended to the "Amount Unsecured"
column;

(2) Under the heading "Free Assets", the cash overdraft in the checking account with CD
Bank, P3,000, will be applied against the cash balance representing sinking fund
accumulation with CD Bank, P33,000, and the sinking fund excess of P30,000 will be
extended to the "Estimated Amount Available" column.

Book values of the asset and liability items would be listed in the "Book Value" columns within the sections
indicated above, with subtraction items being reported as negative balances in the "Book Value" columns.

Exercise 14 - 3

Book Appraised Est. Amount Loss (Gain) on

Value Assets Value Available Realization
Chapter 14 – Suggested Answers page 2

Assets pledged with fully secured creditors:

P20,000 (a) Mercury stock (200 shares) P22,000 (P 2,000)
Less Claim (see contra) 21,000 P 1,000

Assets pledged with partly secured creditors:

90,000 (d) Accounts receivable (deducted contra) 40,000 50,000

Free assets:
20,000 (a) Mercury stock (200 shares) P22,000 22,000 ( 2,000)
40,000 (b) Work in process:
Est. value upon completion P36,000
Materials ( 1,000)
labor ( 4,000) 31,000 31,000 9,000
24,000 (c ) Materials
Required to complete WIP P 1,000
Balance, est. to realize 25,000 26,000 26,000 ( 2,000)

Book Amount
Value Liabilities and Stockholders' Equity Unsecured
P21,000 Fully secured creditors:
Claims (deducted contra) P21,000

Partly secured creditors:

45,000 Notes payable P45,000
Less security: Accounts receivable (see contra) 40,000 P 5,000

Exercise 14 - 4
Cameron Company, Debtor
Deficiency Statement

Estimated losses on realization of assets:

Accounts receivable P13,200
Inventories 48,000
Chapter 14 – Suggested Answers page 3

Prepaid insurance and other prepaid expenses 1,200

Machinery and equipment 40,000
Goodwill and patents 90,000 P192,400
Additional liabilities:
Liquidation costs P10,000
Contingent liabilities 15,000 25,000
Estimated gross loss P217,400
Deduct:
Estimated gains on realization of assets:
Land and buildings 45,000
Estimated net loss P172,400
Loss to be borne by owners:
Capital stock P200,000
Less deficit 31,000 169,000
Estimated deficiency to unsecured creditors P 3,400

Exercise 14 - 5
Clippers Company, Debtor
Statement of Affairs
November 30, 2008

Creditors
With Fully Partly
Liabilities Priority Secured Secured Unsecured
Mortgage payable P200,000
Notes payable P 80,000 P 20,000
Liabilities with priority P 30,000
Unsecured liabilities 210,000
Totals P 30,000 P200,000 P 80,000 P230,000

Assets Available to Creditors

With Fully Partly
Assets Priority Secured Secured Unsecured
Land and buildings P200,000 P120,000
Furniture and equipment P 80,000
Other assets 90,000
Creditors with priority ( 30,000)
Totals P 30,000 P200,000 P 80,000 P180,000

Total unsecured creditors P230,000

Estimated amount available to unsecured creditors without priority 180,000
Estimated deficiency to unsecured creditors P 50,000
Estimated amount payable per peso of unsecured liability (P180,000/P230,000) P .78

PROBLEMS

Problem 14 - 1
Broadway
Chapter 14 – Suggested Answers page 4

Statement
January
Estimated Loss (Gain)
Book Appraised Amount on
Value Assets Value Available Realization
Assets pledged with fully secured creditors:
P60,000 Merchandise inventory P 42,000 P 18,,000
Less Claim: Note payable and accrued interest
(see contra) 40,400 P 1,600
Assets pledged with partly secured creditors:
36,000 Delivery equipment (deducted contra) P 28,000 8,000
Free assets:
9,700 Cash 9,700 9,700
41,000 Notes receivable and accrued interest 26,800 26,800 14,200
87,000 Accounts receivable 75,000 75,000 12,000
20,000 Merchandise inventory 14,000 14,000 6,000
8,000 Furniture and fixtures 9,000 9,000 (1,000)
50,000 Goodwill 0 0 50,000
1,000 Prepaid insurance 0 0 1,000
P 108,200
Estimated amount available P136,100
Creditors with priority (see contra) 12,800
Estimated amount available to unsecured creditors
without priority (approximately P.71 on the peso) P123,300
Estimated deficiency to unsecured creditors 49,900

P312,700 P173,200

Company
of Affairs
31, 2008
Book Amount
Value Liabilities and Stockholders' Equity Unsecured
Creditors with priority:
Estimated liquidation expenses P12,000
P 800 Accrued salaries and wages 800
Total (deducted contra) P12,800
Fully secured creditors:
40,000 Notes payable P40,000
Chapter 14 – Suggested Answers page 5

400 Add Accrued interest on notes payable 400

Total (deducted contra) P40,400
Partly secured creditors:
30,000 Notes payable P30,000
900 Add Accrued interest on notes payable 900
Total P30,900
Less security; Delivery equipment (see contra) 28,000 P 2,900
Unsecured creditors:
30,000 Notes payable P30,000
300 Add accrued interest on notes payable 300 30,300
136,000 Accounts payable 136,000
Notes receivable discounted 4,000
Stockholders' equity:
100,000 Capital stock
10,000 Premium on stock
(35,700) Deficit
P312,700 Total unsecured liabilities P173,200

Problem 14 – 1 – Req. 2

Broadway Company, Debtor

Deficiency Statement
January 31, 2008

Estimated losses on realization of assets:

Merchandise inventory P 24,000
Delivery equipment 8,000
Notes receivable and accrued interest 14,200
Accounts receivable 12,000
Goodwill 50,000
Prepaid insurance 1,000 P109,200
Additional liabilities:
Estimated liquidation expenses P 12,000
Chapter 14 – Suggested Answers page 6

Notes receivable discounted 4,000 16,000

Estimated gross loss P125,200
Deduct:
Estimated gains on realization of assets:
Furniture and fixtures 1,000
Estimated net loss P124,200
Loss to be borne by owners:
Capital stock P100,000
Premium on stock 10,000
P110,000
Less deficit 35,700 74,300
Estimated deficiency to unsecured creditors P 49,900

Problem 14 –2 (Req. 2)

Crooked Company
Deficiency Statement
July 1, 2008

Estimated losses on realization of assets:

Land and buildings P 20,000
Finished goods 12,000
Accounts receivable 6,000
Work in process 20,000
Materials 6,000
Patterns, jigs, and tools 32,000
Machinery and equipment 54,000
Prepaid insurance 2,000 P158,000

Additional liabilities:
Chapter 14 – Suggested Answers page 7

Estimated liquidation expenses P25,000

Accrued wages 800 25,800

Estimated gross loss P183,800

Deduct:
Estimated gains on realization of assets:
Intangibles 4,998

Estimated net loss P178,802

Loss to be borne by owners:

Common stock P200,000
Additional paid-in capital 31,000
P231,000
Less Deficit 120,398 110,602

Estimated deficiency to unsecured creditors P 68,200

Problem 14 – 2 (Req. 1)
Crooked
Statement
July
Estimated Loss (Gain)
Book Appraised Amount on
Value Assets Value Available Realization
Assets pledged with fully secured creditors:
P60,000 Land P140,000 P20,000
100,000 Buildings
Less claim: First mortgage bonds and accrued
interest (see contra) 123,000 P17,000
Assets pledged with partly secured creditors:
42,000 Finished goods (deducted contra) P 36,000 6,000
Free assets:
8,100 Cash 8,100 8,100
79,000 Accounts receivable 73,000 73,000 6,000
42,000 Finished goods 36,000 36,000 6,000
70,000 Work in process:
Est. value upon completion P80,000
Chapter 14 – Suggested Answers page 8

Less cost to complete 30,000 50,000 50,000 20,000

40,000 Materials 28,000 28,000 12,000
40,000 Patterns, jigs, and tools 8,000 8,000 32,000
70,000 Machinery and equipment 16,000 16,000 54,000
2 Intangibles 5,000 5,000 ( 4,998)
2,000 Prepaid insurance 0 0 2,000
P153,002
Estimated amount available P241,100
Creditors with priority (see contra) 33,500
Estimated amount available to unsecured creditors _______
without
priority (approximately P0.75 on the peso) P207,600
_______ Estimated deficiency to unsecured creditors 68,200
P553,102 P275,800

Company
of Affairs
1, 2005
Book Amount
Value Liabilities and Stockholders' Equity Unsecured
Creditors with priority:
Estimated liquidation expenses P 25,000
P 7,700 Accrued wages 8,500
Total (deducted contra) P 33,500
Fully secured creditors:
120,000 First mortgage bonds P120,000
3,000 Add Accrued interest on mortgage bonds 3,000
Total (deducted contra) P123,000
Partly secured creditors:
50,000 Notes payable P 50,000
1,200 Add Accrued interest on notes payable 1,200
P 51,200
Less security: Finished goods (see contra) 36,000 P 15,200
Unsecured creditors:
77,000 Notes payable P 77,000
Chapter 14 – Suggested Answers page 9

3.600 Accrued interest on notes 3,600 80,600

180,000 Accounts payable 180,000
Stockholders" equity:
200,000 Common stock
31,000 Additional paid-in capital
(120,398) Deficit

_______ _______
P553,102 Total unsecured liabilities P275,800

Problem 14 - 2

Crooked Company
Summary of Estimated Payments to Creditors
July 1, 2008

Percentage Amount to
Payment Claim be Paid
Creditors with priority:
Estimated liquidation expenses 100% P 25,000 P 25,000
Accrued wages 100 8,500 8,500
P 33,500
Fully secured creditors:
First mortgage bond 100% P120,000 P120,000
Accrued interest on bonds 100 3,000 3,000
P123,000
Partly secured creditors:
Notes payable ----- P 50,000 --------
Accrued interest on notes payable ----- 1,200 --------
P 51,200
Secured 100% 36,000 P 36,000
Unsecured 75 P 15,200 11,400
P 47,400
Unsecured creditors:
Notes payable 75% P 77,000 P 57,750
Chapter 14 – Suggested Answers page 10

Accrued interest on notes payable 75 3,600 2,700

Accounts payable 75 180,000 135,000
P195,450

Note relative to "Summary of Estimated Payments to Creditors": Estimated payment on the unsecured
portion of the notes of P11,400, and on the remaining unsecured liabilities, P195,450, results in a total of
206,850, which is p750 less than the estimated amount to become available to unsecured creditors as
reported by the statement of affairs. The discrepancy emerges because the estimated amount available as
determined by the statement is actually slightly more than the 75% figure and the resulting discrepancy is
not objectionable, however, in view of the fact that the data are presented as estimates and a refinement of
such data would suggest a degree of accuracy that is not attainable.

Problem 14 - 6
Payless
Statement
June
Estimated Loss (Gain)
Book Appraised Amount on
Value Assets Value Available Realization
Assets pledged with fully secured creditors:
P 80,000 Accounts receivable P 80,000
Less claim; Notes payable (see contra) 60,000 P20,000
26,000 Land P 50,000 (P 24,000)
180,000 Buildings 200,000 ( 40,000)
240,000 Machinery 150,000 90,000
Total P420,000
Less claim: Mortg.and accrued int. (see contra) 264,800 155,200

Assets pledged with partly secured creditors:

40,000 Marketable securities P 38,000 2,000
Accrued interest 400 ( 400)
Total (deducted contra) P 38,400

Free assets:
4,000 Cash P 3,000 3,000 1,000
60,000 Accounts receivable P60,000
Add credit balance (see contra) 10,000 70,000 70,000
120,000 Finished goods 100,000 100,000 20,000
Chapter 14 – Suggested Answers page 11

80,000 Materials, expected to be realized as

finished goods P140,000
Less cost to complete 20,000 120,000 120,000 ( 40,000)
40,000 Goodwill 0 40,000
10,000 Prepaid expenses 0 ______ 10,000
P 58,600
Estimated amount available P468,200
Creditors with priority 83,000
Estimated amount available to unsecured creditors P385,200
w/o priority
_______ Estimated deficiency to unsecured creditors 36,400
P880,000 P421,600

(2) Estimated settlement per peso of unsecured liabilities: estimated amount available, P385,200,
divided by total unsecured liabilities, P421,600, 91% or P0.91 on the peso.

Corporation
of Affairs
30, 2008
Book Amount
Value Liabilities and Stockholders' Equity Unsecured
Creditors with priority:
P 30,000 Withheld taxes payable P 30,000
Employer payroll taxes payable 1,000
30,000 Accrued wages 30,000
Estimated liquidation expenses 20,000
Auditor's fee for liquidation work 2,000
Total (deducted contra) P 83,000

Fully secured creditors:

60,000 Notes payable (deducted contra) P 60,000
260,000 Mortgages payable P260,000
Add Accrued interest 4,800
Total (deducted contra) P264,800

Partly secured creditors:

40,000 Notes payable P 40,000
Less security: Marketable securities and accrued interest
(see contra) 38,400 P 1,600

Unsecured creditors:
130,000 Accounts payable 130,000
170,000 Notes payable 170,000
Chapter 14 – Suggested Answers page 12

Accounts receivable (credit balances) 10,000

Unbilled auditor's fee 10,000
Estimated liability on pending damage suit 100,000

Stockholders' equity:
200,000 Common stock
(40,000) Retained earnings (deficit)
_______ _______
_
P880,000 Total unsecured liabilities P421.600

Problem 14 – 8
Mackintosh
Statement
November
Estimated Loss (Gain)
Book Appraised Amount on
Value Assets Value Available Realization
Assets pledged with fully secured creditors:
P105,000 Land P250,000 (P 15,000)
130,000 Buildings
Less claim, mort. payable, and accrued interest
(see contra) 205,000 P 45,000
Assets pledged with partly secured creditors:
90,000 Investments (deducted contra) 55,000 35,000
Free assets:
31,500 Cash 31,500 31,500
125,000 Accounts receivable 106,500 106,250 18,750
230,000 Inventories 145,000 145,000 85,000
110,000 Machinery and equipment (net) 30,000 30,000 80,000
100,000 Goodwill 0 0 100,000
303,750
Estimated amount available P357,750
Creditors with priority (see contra) 35,700
Estimated amount available to unsecured creditors P322,050
w/o priority
_______ Estimated deficiency to unsecured creditors 40,450

P921,500 P362,500
Chapter 14 – Suggested Answers page 13

(2) Estimated amount available, P322,050, divided by total unsecured liabilities, P362,500, equals
estimated amount payable on claims, 89% or 89 centavos on the dollar.

Company
of Affairs
01, 2008
Book Amount
Value Liabilities and Stockholders' Equity Unsecured
Creditors with priority:
Estimated liquidation expenses P 30,000
Taxes payable 4,000
Wages payable 1,700
Total (deducted contra) P 35,700
Fully secured creditors:
P200,000 Mortgage payable P200,000
Add Accrued interest 5,000
Total (deducted contra) P205,000
Partly secured creditors:
80,000 Notes payable P 80,000
Add accrued interest 2,500
Total P 82,500
Less security: Investments (see contra) 57,000 P 27,500
Unsecured creditors:
335,000 Accounts payable 335,000
Stockholders' equity:
400,000 Common stock
50,000 Additional paid-in capital
(143,500) Retained earnings (deficit)
P921,500 Total unsecured liabilities P362,500

CORRECTION: Additional paid-in capital is P50,000 instead of P40,000.

Chapter 14 – Suggested Answers page 14

2.
Mackintosh Company
Deficiency Statement
November 1, 2008

Estimated losses on realization of assets:

Accounts receivable P 18,750
Inventories 85,000
Investments 35,000
Machinery and equipment 80,000
Goodwill 100,000 P318,750
Additional liabilities:
Estimated liquidation expenses P 30,000
Taxes payable 4,000
Wages payable 1,700
Accrued interest on notes payable 2,500
Accrued interest on mortgage 5,000 43,200
Estimated gross loss P361,950
Deduct:
Estimated gains on realization of assets:
Land and buildings 15,000
Estimated net loss P346,950
Loss to be borne by owners:
Capital stock P400,000
Additional paid-in capital 50,000
P450,000
Less deficit 143,500 306,500
Estimated deficiency to unsecured creditors P 40,450
Chapter 14 – Suggested Answers page 15