CORPORATE LIQUIDATION

Name:____________________________________________ Section:___________________

Summary of answers (5 pts each):

1 6 11 16
2 7 12 17
3 8 13 18
4 9 14 19
5 10 15

Part I: Theory of Accounts

1. It refers to the extinguishment of the juridical personality of a corporation for causes expressly provided by law.

a. Corporate liquidation
b. Corporate dissolution
c. Corporate rehabilitation
d. Corporate termination

2. It refers to process of winding up the affairs of the corporation by settling its corporate debts and distributing the
remainder to the stockholders.

a. Corporate liquidation
b. Corporate dissolution
c. Corporate rehabilitation
d. Corporate termination

3. After the date of corporate dissolution, what is the maximum period allowed by law to a dissolved corporation to
complete its liquidation process?

a. 1 year
b. 2 years
c. 3 years
d. 4 years

4. What is the term used when the stockholders’ equity has debit balance?

a. Deficit
b. Deficiency
c. Delinquency
d. Default

5. Which of the following unsecured debts with priority shall be paid first during corporate liquidation?

a. Corporate liabilities to employees

b. Obligations arising from corporate crime
c. Corporate liabilities arising from taxes to government
d. Obligations arising from corporate tort or quasi-delict

6. Which of the following creditors can always fully recover its claim from a dissolved corporation during corporate
liquidation?

a. Fully secured creditors

b. Partially secured creditors
c. Unsecured creditors with priority
d. Unsecured creditors without priority

7. Which of the following items is not being considered in the computation of recovery percentage of unsecured creditors
without priority?

a. Assets reserved for fully secured credits

b. Assets reserved for partially secured credits
c. Unsecured portion of partially secured liabilities
d. Assets not used as collateral for any liability

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Part II: Problem Solving

PROBLEM 1: The following balances were ascertained in NOMONEY Corp. which is experiencing insolvency:

Cash 8,000 Accounts payable 80,000

Notes receivable 120,000 Accrued expenses 30,000
Inventories 80,000 Salaries payable 15,000
Prepaid expenses 10,000 Mortgage payable 155,000
Equipment, net 150,000 Ordinary shares 100,000
Deficit (12,000)
TOTAL 368,000 TOTAL 368,000

Additional information:
• Estimated net realizable value of the notes receivable was P105,000 and was pledged to the mortgage payable.
• 80% of the book value of the inventories can be sold at P45,000 and was pledged to 60% of the accounts payable
• The remaining book value of the inventories have an estimated fair value of P20,000
• 80% of the remaining unpaid accounts payable were secured by the equipment having an estimated fair value of
P60,000.
• Prepaid expense has no estimated fair value.
• Liquidation and administration expense were estimated in the amount of P8,000
• Income tax payable had been accrued in the amount of P2,000 (the accountant recorded it using the accrued
expense account)
• Interest on the notes receivable and mortgage payable have not been accrued in the amount of P10,000 and P15,000
respectively.

8. How much is the estimated deficiency?

a. 61,400
b. 40,000
c. 55,000
d. 46,400

9. How much are the net free assets?

a. 52,400
b. 37,400
c. 31,000
d. 46,000

10. How much is the estimated payment to the mortgage payable?

a. 137,264
b. 146,191
c. 133,453
d. 142,379

11. How much is the estimated recovery percentage to partially secured accounts payable?

a. 97.29%
b. 95.85%
c. 96.28%
d. 96.86%

PROBLEM 2: Cagayan Company is experiencing financial problems which resulted to ultimate bankruptcy. The statement
of financial position of the entity before liquidation is presented below:

Cash 100,000 Income tax payable 200,000

Inventory 300,000 Salaries payable 300,000
Land 200,000 Note payable 800,000
Mortgage payable 100,000
Accounts payable 400,000
Contributed capital 500,000
Deficit (1,700,000)

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

12. What is the amount received by the holder of the note payable at the end of corporate liquidation?

a. 320,000
b. 300,000
c. 250,000
d. 260,000

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13. What is the amount received by the holder of the mortgage payable at the end of corporate liquidation?

a. 120,000
b. 200,000
c. 150,000
d. 100,000

14. What is the amount received by the employees at the end of corporate liquidation concerning their salaries?

a. 100,000
b. 120,000
c. 72,000
d. 300,000

PROBLEM 3: Bancarote Inc. is under court-supervised liquidation due to its insolvency. The court appointed liquidator has
provided the following data after conducting an inventory of Bancarote’s assets and liabilities:
• The total assets which are not used as security for any liability amounted to P5M while the total unsecured liabilities
amounted to P20M
• The total assets which are used as collateral or security for corporate obligations amounted to P10M. 3/4 of these
assets secure a mortgage payable with a book value of P2M including interest while the remainder secure a note
payable with book value of 3,5 M including interest.
• Salaries payable amounted to 2M while taxes due to government amounted to P1M.

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

a. 25%
b. 37.5%
c. 41.67%
d. 52.5%

16. What is the amount received by partially secured creditors?

a. 2,750,000
b. 2,875,000
c. 2,916,700
d. 3,025,000

PROBLEM 4: Liberty Corporation provided the following balances in July 1, 2020:

Cash 5,500 Accounts payable 59,500

Accounts receivable 35,000 Wages payable 25,000
Inventories 60,000 Tax payable 35,000
Notes receivable 78,000 Note payable 65,000
Equipment 256,000 Mortgage payable 175,000
Share capital 120,000
Deficit (45,000)
Total 434,500 Total 434,500

In the statement of realization and liquidation the following data are ascertained for the month of July:

• The note payable and mortgage payable together with their respective interests are paid.
• Only 7/8 is collected from the existing accounts receivable at the beginning of the month.
• Half of the inventories were sold for P45,000.
• Only P68,500 of the notes receivable is collected.
• Equipment is sold for P225,000.
• Administrative expenses of P13,800 are paid.
• Additional credit sales amounting to P10,500 are made for the remaining inventories.
• Interests not accrued for the month are note receivable P1,500, note payable P5,500 and mortgage payable P10,500.
• All existing noncash assets at the beginning of the month are sold or collected during the month.

17. How much is the profit or loss in the statement of realization and liquidation?

a. (42,475)
b. 22,795
c. (77,675)
d. 75,175

18. How much is the estate equity at July 31, 2020?

a. (102, 975)
b. 32,525
c. 150.175
d. (2,675)

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PROBLEM 5: Finish Corporation has been undergoing liquidation since January 1. Its condensed statement of realization
and liquidation for the month of June is presented below:

Interest received in cash on investment 10,500

Purchases on account 105,000
Liabilities liquidated 2,450,000
Assets realized 2,100,000
Payment of expenses of trustee 525,000
Liabilities to be liquidated, June 1 4,574,500
Sales on Account 50,000
Assets to be realized, July 1 2,940,000
Liabilities not liquidated, June 30 2,229,500
Sales for cash 1,750,000
Assets not realized, May 31 6,650,000

19. What is the net gain (loss) on realization and liquidation?

a. 1,225,000
b. (479,500)
c. (1,225,000)
d. 479,500

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