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PRACTICAL ACCOUNTING 2 N. D.

DE LEON
Corporate Liquidation

MULTIPLE CHOICE-THEORETICAL
Select the best answer for each of the following situations:

1. The bankruptcy trustee for Insolvent Company sold assets having a carrying amount of P25,000
for P18,500 cash. The journal entry to record the sale is:
a. Cash 18,500
Loss on realization of assets 6,500
Assets 25,000
b. Cash 18,500
Estate administrative expenses 6,500
Assets 25,000
c. Cash 18,500
Cost of Goods Sold 11,500
Sales 5,000
Assets 25,000
d. Cash 18,500
Estate Equity 6,500
Assets 25,000

2. On April 30, 2010, Carlos Badion, trustee in bankruptcy liquidation for BPA Company, paid
P12,140 in full settlement of BPA liability under product warranty, which had been carried in
Badion’s accounting records at P10,000. The appropriate journal entry for Badion is:
a. Liability under product warranty 12,140
Cash 12,140
b. Liability under product warranty 10,000
Estate Equity 2,140
Cash 12,140

c. Liability under product warranty 10,000


Product warranty expense 2,140
Cash 12,140

d. Liability under product warranty 10,000


Retained Earnings (PPA) 2,140
Cash 12,140

3. Recom Company is being liquidated in bankruptcy. Unsecured creditors without priority are
expected to be paid P0.50 on the peso. Pacman Enterprises is the payee of a note receivable from
Recom in the amount of P50,000, which is collateralized by machinery with a current fair value of
P10,000. The total amount expected to be realized by Pacman on its receivable from Recom is:
a. P35,000 c. P25,000
b. P30,000 d. P10,000

I
When Pasig Company filed for liquidation with the Securities and Exchange Commission, it prepared
the following balance sheet.

Current assets, net realizable value, P50,000 P 80,000

Land and buildings, fair value, P240,000) 200,000

Goodwill, fair value, P0 40,000


Total assets P 320,000

Accounts payable P 160,000


Mortgage payable, secured by land and building
200,000
Common stock 100,000
Retained earnings, deficit ( 140,000)
Total equities P 320,000

1. What is the estimated deficiency to unsecured creditors?


a. P 70,000 c. P120,000
b. P 90,000 d. P140,000

2. What percentage of their claims are the unsecured creditors likely to get?
a. 43.75% c. 56.25%
b. 50.00% d. 100.00%

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II
A distressed corporation 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 two employees 6,000
Bonds payable 70,000
Administrative expenses for liquidation 20,000
The said company has the following assets:
Book value Fair value
Current assets P 80,000 P 33,000
Land 100,000 90,000
Building and equipment 100,000 110,000

3. How much will the holders of notes payable collect following the liquidation?
a. P108,000 c. P 83,000
b. P 90,000 d. P120,000

III
The Moon Company has the following data in connection with its bankruptcy petition with the
Securities and Exchange Commission at the end of 2016.
Unsecured creditors P 230,000
Liabilities with priority 110,000

Secured liabilities
Debt 1, P210,000; value of pledged asset 180,000
Debt 2, P170,000, value of pledged asset 100,000
Debt 3, P120,000, value of pledged asset 140,000

The company also has a number of other assets that are not pledged in any way. The creditors holding
Debt 2 want to receive at least P142,000.
4. For how much do these free assets have to be sold so that Debt 2 would receive exactly
P142,000?
a. P 308,000 c. P340,000
b. P 198,000 d. P288,000
IV
TRP Enterprises filed a voluntary bankruptcy petition on July 31, 2016 and its Statement of Affairs
reflects the following amounts:
Book Value Current Value
Assets:
Pledged with Fully secured creditor P 520,000 P 410,000
Pledged with Partially secured creditor 292,500 92,500
Free Assets 350,000 47,500
Totals P1,162,500 P 550,000

Liabilities:
Unsecured with priority P 65,000
Fully secured 402,250
Partially secured 225,000
Unsecured without priority 345,000
Sub-total P1,037,250
Stockholders’ Equity
Capital stock 147,500
Retained Earnings, deficit ( 22,250)
Totals P1,162,500
5. The total estimated deficiency is allocable to the following creditors at the respective amounts
shown below:
Unsecured Fully Partially Unsecured
W/priority Secured Secured w/out priority
a. P 0 P0 P132,500 P289,750
b. P 65,000 P0 P225,000 P345,000
c. P 9,750 P0 P132,500 P345,000
d. P 0 P110,000 P225,000 P289,750

6. The estimated payment that will be made to partially secured creditors in the event of liquidation
at this point is:
a. P205,125 c. P 92,500
b. P112,625 d. P225,000

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Browny Corp., is undergoing liquidation since August 1, 2016. Five months later, on December 31,
2016, its condensed realization and liquidation statement shows the following:
Assets:
To be realized P1,375,000
Acquired 750,000
Realized 1,200,000
Not realized 1,375,000
Liabilities:
Liquidated 1,875,000
Not liquidated 1,700,000
To be liquidated 2,250,000
Assumed 1,625,000
Supplementary:
Charges 3,125,000
Credits 2,925,000
7. The net gain (loss) for the five-month period is:
a. P (325,000) c. P425,000
b. P250,000 d. P550,000

8. The statement of affairs of Boon-Boon Co. shows the following:


Estimated gains on realization of
assets P 1,260,000
Estimated losses on realization of
assets 2,260,000
Additional assets 1,000,000
Additional liabilities 300,000
Capital stock 2,000,000
Deficit 800,000
The pro-rate payment on the peso, to stockholders, is:
a. P0.30 c. P0.70
b. P0.43 d. P0.75

9. Yehey Company filed a voluntary bankruptcy petition on August 15, 2016 and the statement of
affairs reflect the following amounts:
BOOK ESTIMATED
CARRYING CURRENT
VALUE VALUE

Pledged with fully secured


creditors P 150,000 P 185,000
Pledged with partially
secured creditors 90,000 60,000
Free Assets 210,000 160,000
P 450,000 P 405,000

Liabilities
Liabilities with priority P 35,000
Fully secured creditors 130,000
Partially secured creditors 100,000
Unsecured creditors 270,000
P 535,000
Assumes that the assets are converted into cash at the estimated current value and the business
is liquidated. How much cash will be available to pay the unsecured non-priority claims?
a. P240,000 c. P160,000
b. P180,000 d. P125,000

10. Goggle Co. has been forced into bankruptcy and liquidated. Unsecured claims will be paid at the
rate of P0.70 on the peso. Gaggle Co. hold a non-interest bearing note receivable from Google Co.
in the amount of P60,000 collateralized by machinery with a liquidation value of P10,000. The
total amount to be realized by Gaggle on this note receivable is:
a. P45,000 c. P25,000
b. P30,000 d. P10,000

11. The statement affair for Break.Com Corporation shows that approximately P0.78 on the peso
probably will be paid to unsecured creditors without priority. The corporation owes Boy Company
P23,000 on a promissory note, plus accrued interest of P940. Inventories with a current fair value
of P19,200 collateral the note payable. Compute the amount that the Boy should receive from
Break.Com assuming that the actual payments to unsecured creditors without priority consist of
78% of total claims. Round all amounts to the nearest peso.
a. P19,200 c. P33,987
b. P22,897 d. P52,200

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Items 12 to 15 are based in the following:
The following data were taken from the statement of affairs of Bruno Corporation:
Assets pledged for fully secured liabilities
(current fair value, P75,000) P 90,000
Assets pledged for partially secured
liabilities (current fair value P52,000) 74,000
Free assets (current fair value , P40,000) 70,000
Unsecured liabilities with priority 7,000
Fully secured liabilities 30,000
Partially secured liabilities 60,000
Unsecured liabilities without priority 112,000
12. The amount that will be paid to creditors with priority is:
a. P7,000 c. P7,500
b. P6,000 d. P6,200

13. The amount to be paid fully secured creditors is:


a. P30,000 c. P20,000
b. P32,000 d. P35,000

14. The amount to be paid to partially secured creditors is:


a. P52,700 c. P56,200
b. P57,200 d. P 57,000

15. The amount to be paid to unsecured creditors:


a. P78,200 c. P72,000
b. P70,800 d. P72,800

- now do the drill -

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