120 Chapter CHAPTER MULTIPLE CHOICE ANSWERS AND SOLUTIONS 7-1: c Amount realized secured by inventory Unsecured claim (P10,000 x 25%) P 30,000 2,500 Total amount received P 32,500 Amount realized secured by inventory Unsecured claim (P88,000 x 75%) P120,000 66,000 Total amount received P186,000 7-2: d 7-3: d (P15,000,000 + P200,000) 7-4: a Realizable value: Current assets Land and building Less mortgage payable P 50,000 P240,000 _200,000 40,000 Total Less accounts payable 90,000 _160,000 Estimated deficiency to unsecured creditors P 70,000 7-5: c Total realizable value to unsecured creditors (P90,000)/total unsecured Claims (P160,000) = 56.25% 7-6: a Free assets: Current assets Buildings and equipment Total Liabilities with priority: Administrative expenses Salary payable Income taxes Total P 33,000 _110,000 P143,000 P 20,000 6,000 8,000 P 34,000 Corporation in Financial Difficulty – Liquidation Free assets after payment of liabilities with priority: (P143,000 – P34,000) Unsecured liabilities Notes payable Accounts payable Bonds payable Total P109,000 P 30,000 83,000 70,000 P183,000 Percentage of Unsecured liabilities to be paid: P109,000 / P183,000 = 60% Payment of notes payable: Value of security (land) 60% of remaining P30,000 Total collected P 90,000 18,000 P108,000 7-7: c Free assets: Other assets Excess from assets pledged with secured Creditors (P116,000 – P70,000) Total Liabilities with priority Free assets after payment of liabilities with priority (P126,000 – P42,000) Unsecured liabilities: Excess of partially secured liabilities over pledge Assets (P130,000 – P50,000) Unsecured creditors Total P 80,000 46,000 P126,000 P 42,000 P 84,000 P 80,000 _200,000 P280,000 Recovery percentage: P84,000 / P280,000 = 30% Payment of partially secured debt: Value of pledged assets 30% of remaining P80,000 Total collected P 50,000 24,000 P 74,000 122 Chapter 7-8: a The holder of Debt Two will receive P100,000 from the sale of the pledged asset Since the holder wants to receive P142,000 out of the total debt of P170,000, the company must be able to generate enough cash to pay off 60% of the unsecured liabilities (P42,000/P70,000) after paying 100% of the liabilities with priority (P110,000) Unsecured liabilities: Unsecured creditors Excess liability of Debt One in excess of pledged Asset (P210,000 – P180,000) Excess liability of Debt Two in excess of pledged Asset (P170,000 – P100,000) P230,000 30,000 70,000 Total unsecured liabilities Necessary percentage P330,000 60% Cash needed for these liabilities P198,000 In order for the holder of Debt Two to received exactly P142,000, the other free assets must be sold for P308,000 With that much money, the liabilities with priority (P110,000) can be paid with the remaining P198,000 going to the unsecured debts of P330,000 This 60% figure would insure that the holder of Debt Two would get P100,000 from the pledged asset and P42,000 (P70,000 x 60%) from the free assets 7-9: c Estate equity, beg (P100,000 – P85,000) Loss on realization (P100,000 – P75,000) Unrecorded liabilities: Interest expense Administrative expense Estate deficit P 15,000 ( 25,000) P 250 4,000 ( 4,250) P( 14,250) 7-10: c Total assets at net realizable value Fully secured liabilities Estimated administrative expense P 75,000 (40,000) _( 4,000) Estimated amount available Unsecured claims (P45,000 + P250) P 31,000 (45,250) Estimated deficiency to unsecured creditors P 14,250 Corporation in Financial Difficulty – Liquidation 7-11: b Assets pledged with fully secured creditors Fully secured creditors Free assets _160,000 Total free assets Less: Liabilities with priority Available to unsecured non-priority claims P185,000 _130,000 55,000 215,000 35,000 P180,000 7-12: b Machinery Recoveries of unsecured claims (50,000 - 10,000) X 50 Amount to be realized P 10,000 20,000 P 30,000 7-13: b Notes Payable Less: Inventories Unsecured Liabilities % of recovery Recovery Add: Inventories Amount to be received by Wood 7-14: a 7-15: a 7-16: b 7-17: d _ P 23,940 19,200 4,740 78% 3,697 _19,200 P 22,897 - P7,000 - P30,000 - P57,200 [52,000 + (8,000 X 65)] - P72,800 (112,000 X 65) 7-18: d Estimated loss: Account Receivable Inventories (28,000 - 18,500) Building (59,000 - 22,000) Equipment (5,600 - 2,000) Goodwill Prepaid expenses Less: Stockholder's equity Common stock Deficit Estimated deficiency P 8,160 9,500 7,000 3,600 5,650 _430 P 72,000 ( 16,660) P 64,340 _55,340 P 9,000 124 Chapter 7-19: d Accounts Receivable (39,350 - 16, 110) Notes Receivable (18,500 - 12,500) Inventories (87,850 - 45,100) Prepaid expenses Equipment (48,800 - 9,000) Total estimated loss P 23,240 600 42,750 950 39,800 P112,740 7-20: b P33,750 (95,000 - 61,250) on Land and Building 7-21: d Total Free Assets: Balance of Assets Pledged to Fully Secured Creditor (95,000 - 90,000) Free Assets: Cash Accounts Receivable Inventories Equipment Total Less: Unsecured liabilities with priority (1,850 + 4,650) Net Free Assets Divide by Unsecured creditors: Balance of Partially Secured Creditor Notes Payable - PNB P 15,000 Notes Receivable 12,500 Accounts Payable 52,500 Notes Payable 51,250 Estimated recovery % P 5,000 P 2,700 16,110 45,100 9,000 72,910 77,910 _6,500 P 71,410 2,500 103,750 ÷ P106,250 67% 7-22: d Fully secured (Notes Payable) Partially secured: Notes Payable - PNB Add (2,500 X 67%) Unsecured Creditor with Priority Unsecured Creditor without Priority (103,750 X 67%) Total P 90,000 P12,500 1,675 14,175 6,500 69,513 P180,188 Corporation in Financial Difficulty – Liquidation 7-23: a Unsecured creditors without priority Estimated deficiency to unsecured creditors: Loss on realization Estimated liquidation expenses Total Stockholders’ equity Net free assets Liabilities with priority Free assets P1,102,500 551,250 55,125 606,375 441,000 165,375 937,125 122,500 P 1,059,625 7-24: a Estimated net gain (loss) on realization: Gain on realization Loss on realization Estimated claims Total Stockholders equity Estimated deficiency 78,750 (336,700) (257,950) ( 43,750) (301,700) 295,750 P( 5,950) 7-25: b Notes payable (175,000 – 140,000) Unsecured liabilities (420,000 – 52,500) Total Free assets (157,500 + 210,000) Estimated deficiency P 35,000 367,500 402,500 367,500 35,000 7-26: a Old receivable (net) Marketable securities Old inventory Depreciable assets- net Total assets to be realized P 38,000 12,000 60,000 96,000 P206,000 Old receivable New receivable Marketable securities Sales of inventory Total asset realized P 21,000 47,000 10,500 75,000 P153,500 7-27: a 7-28: a Gain on sale of inventory (P75,000 – 60,000) Loss on realization: 15,000 Marketable securities (12,000 – 10,500) Trustee’s expenses Depreciation Net loss 1,500 4,300 16,000 126 (21,800) P( 6,800) Chapter SOLUTIONS TO PROBLEMS Problem – (A) Laguna Company Statement of Affairs October 31, 2008 Book Value Estimated Assets Realizable Value Assets pledge for fully secured creditors: P107,000 Plant assets P67,400 Less; Fully secured liabilities ._ 50,400 Assets pledged for partially secured creditors: 39,000 Inventories P18,000 4,000 46,000 2,000 P198,000 Book Value Free Assets: Cash P 4,000 Accounts, receivable 46,000 Supplies 1,500 Total free assets Less: Unsecured liabilities with priority Net Free Assets Estimated deficiency to unsecured creditors (to balance) Creditors' Liabilities & Stockholders' Equity Claim Fully secured liabilities: P50,400 Mortgage payable (including interest, P400) P50,400 Partially secured liabilities: 21,000 Notes payable P21,000 Less: Inventory _18,000 Unsecured creditors with priority: 5,800 Wages payable P 5,800 1,200 Property taxes payable _1,200 Total P 7,000 Unsecured creditors without priority: 60,000 Accounts payable 19,000 Notes payable Stockholders' Equity P198,000 (B) Creditor Group Amount of Percentage Claim paid Free Assets P17,000 _51,500 P68,500 7,000 P61,500 _20,500 P82,000 Unsecured Liabilities P 3,000 60,000 19,000 _– P82,000 Amount to be Paid to be Unsecured liabilities with priority Fully secured creditors Partially secured creditors Unsecured creditors without priority * P18,000 + (P3,000 X 0.75) = P20,250 (C) See statement of affairs in requirement (A) P7,000 50,400 21,000 79,000 P7,000 50,400 20,250 * 59,250 Corporation in Financial Difficulty – Liquidation 127 Problem – VC Corporation Statement of Realization and Liquidation Month Ended January 31, 2008 Assets to be realized: Land P10,000 Building 43,000 Equipment 28,000 Patents 4,400 P20,800 Assets Acquired P85,400 Assets realized: land P Building Equipment 8,800 Patents _12,000 Assets not realized: Land P10,000 Building 43,000 Equipment _13,000 66,000 Liabilities Liquidated: Account payable P14,000 Loans payable 7,000 120,000 Liabilities not Liquidated: Accounts payable Loans payable 66,000 33,000 21,000 Liabilities to be Liquidated: Accounts payable P80,000 Loans payable _40,000 99,000 Gain on realization _7,600 _6,200 Total P213,000 P213,000 Loss on realization Total VC Corporation Balance Sheet January 31, 2008 Cash P 66,000 Land 33,000 100.0% 100.0% 96.4% 75.0% P 6,700 Accounts payable 10,000 Loans payable Building 43,000 ( 26,300) Equipment _13,000 Total P 72,700 00 Estate deficit P VC Corporation Estate Deficit January 31, 2008 Gain on realization Loss in realization Trustee's expenses Net gain on realization Estate deficit, January 1, 2008 Estate deficit, January 31, 2008 P 7,600 ( 6,200) ( 1,300) P 100 ( 26,400) P(26,300) 128 Chapter Problem – Rizal Corporation Statement of Affairs Book Values Assets Assets pledged to fully secured creditors: P 80,000 Land and building Less: Mortgage payable 50,000 Finished Goods Less: Loan payable 32,000 12,000 4,000 8,000 36,000 1,000 8,000 45,000 16,000 Estimated Realizable Value Assets pledged to partially secured creditors: Accounts receivable (80% x 30,000) Trucks Totals Free Assets: Cash AR (20% x 30,000) Inventory – Materials Prepaid expense Trucks Equipment Intangible _ Total Free Assets Less: Unsecured liability with priority (12,000 + 8,000) Net free assets Estimated deficiency to unsecured creditors (to Balance) P102,000 43,000 P 55,000 50,000 Liabilities and Equity P 59,000 24,000 3,500 27,500 4,000 6,000 27,000 2,500 25,000 64,500 P128,500 20,000 108,500 81,000 P 292,000 Total unsecured liabilities Book Values Free Assets P189,500 Creditors' Claim Unsecured Liabilities Fully secured creditors: Mortgage payable Loans payable Total 94,000 50,000 144,000 Partially secured creditors': Bank Loan Less: Receivable (80% x 30,000) 5,000 Truck Loan Less: trucks 25,000 24,000 5,000 3,500 Unsecured creditors with Priority: Wages payable Taxes payable Totals 12,000 8,000 20,000 P 43,000 50,000 25,000 12,000 8,000 Unsecured creditors: 77,000 Accounts payable 110,000 Stockholder Loan ( 38,000) Stockholder Equity P 292,000 Total Corporation in Financial Difficulty – Liquidation P 77,000 110,000 187,000 P189,500 129 Problem – Mapayapa Corporation Statement of Affairs November Book Value Assets Assets pledged to fully secured creditors: P60,000 Investments 180,000 Accounts receivable Total Less: Note payable 66,000 248,000 291,000 870,000 114,000 – _ P1,839,000 Book Estimated Realizable Value Free Assets P 69,000 171,000 240,000 210,000 P 30,000 Free assets: Cash P 66,000 Accounts receivable 193,500 Merchandise inventory 180,000 Plant & equipment 330,000 Notes receivable 108,300 Patent 12,000 Total free assets Less: Unsecured liabilities with priority Net free asset Estimated deficiency (to balance) Total _889,800 919,800 13,800 906,000 60,300 P966,300 Creditor's Unsecured Value Liabilities & Equity Fully secured creditors: P 210,000 Notes payable Unsecured creditor with priority: Accrued wages Accrued property tax Total Claim Liabilities P210,000 P 7,200 _6,600 P 13,800 Unsecured creditor: Account payable Accrued expenses 300,000 Capital stock 369,000 Retained earnings P1,839,000 Total 960,000 P960,000 6,300 _ P966,300 130 Chapter Problem – a b Total fair value of assets (estimated proceeds) Less:Fully and partially secured creditors claim: Notes payable, interest (secured by receivable and inventory) 125,000 Bonds payable (secured by land & building) 231,000 Available to unsecured creditors Less:Unsecured creditors with priority: Wages payable P 9,500 Taxes payable 14,000 Amount available to unsecured creditors P471,000 23,500 P 91,500 Unsecured portion of notes payable and interests (P195-P125) Accounts payable Total claims of unsecured creditors P 70,000 95,000 P165,000 356,000 115,000 P91,500 ––––––– = 55.45% P165,000 c Distribution of P471,000: Creditors Accounts payable Wages payable Taxes payable Amount P 95,000 9,500 14,000 Percent Realized 55.45% 100% 100% Total Payment P 52,678 9,500 14,000 Notes payable & interests 125,000 70,000 Bonds payable & interests 231,000 Total estimated payment 100% 55.45% 100% 125,000 38,815 _231,000 P470,993 Corporation in Financial Difficulty – Liquidation 131 Problem – Evergreen Company Statement of Affairs June 30, 2008 Book Values P460,000 80,000 140,000 100,000 120,000 100,000 Estimated Realizable Values ASSETS Pledged with fully secured creditors: Land and building P340,000 Less: Mortgage payable (including accrued interest) (330,000) Free Assets: Cash P 80,000 Accounts receivable – net 126,000 Inventories 84,000 Machinery – net 40,000 Goodwill _ _0_ Available for Unsecured Creditors P 10,000 330,000 Total free assets Less: liabilities with priority 340,000 _140,000 Net free assets Estimated deficiency (Squeeze figure) 200,000 _130,000 P1,000,000 P330,000 LIABILITIES AND STOCKHOLDERS' EQUITY Secured & Priority Claims Liabilities with priority Unsecured Non-priority Liabilities P120,000 20,000 Wages payable Property taxes payable P120,000 20,000 P140,000 300,000 30,000 Total Fully secured creditors Mortgage payable Interest on mortgage payable 220,000 100,000 10,000 Total P330,000 Unsecured creditors Accounts payable Note payable-unsecured Interest payable-unsecured 300,000 30,000 Stockholders' Equity 400,000 Capital stock (200,000) Retained earnings (deficit) P220,000 100,000 10,000 _ P330,000 P1,000,000 Settlement per peso of unsecured creditors is P.6250 (P200,000/P320,000) No payment is made for the P10,000 unsecured interest claim 132 Chapter Problem – Entries on trustee's books 2008 March 1: Cash .P8,000 Accounts receivable – net .16,000 Inventories .72,000 Land .40,000 Buildings – net 200,000 Intangible assets 52,000 Accounts payable Note payable Deferred revenue Wages payable Mortgage payable Estate equity To record custody of Kimerald Corporation March to 31:Cash .15,200 Estate equity .800 Accounts receivable-net To record collection of receivables and recognize loss Cash .38,800 Estate equity 33,200 Inventories To record sale of inventories at a loss P100,000 80,000 2,000 6,000 160,000 40,000 16,000 72,000 Cash .180,000 Estate equity 60,000 Land Buildings-net To record sale of land and buildings at a loss 40,000 200,000 Estate equity 52,000 Intangible assets To write off intangible assets 52,000 Estate equity 16,400 Administrative expenses payable 16,400 To accrue trustee expenses Corporation in Financial Difficulty – Liquidation 133 Financial Statements Kimerald Corporation in Trusteeship Balance Sheet March 31, 2008 Assets Cash P242,000 Liabilities and Deficit Accounts payable Note payable-unsecured Revenue received in advance Wages payable Mortgage payable Administrative expense payable-new P100,000 80,000 2,000 6,000 160,000 16,400 Total liabilities Less: Estate deficit P364,400 _122,400 Total liabilities net of deficit P242,000 Kimerald Corporation in Trusteeship Statement of Cash Receipts and Disbursements March to 31, 2008 Cash balance, March 1, 2008 Add: Cash receipts Collections of receivables P 15,200 P 8,000 Sale of inventories 38,800 Sale of land and buildings 180,000 _234,000 Total Less: Cash disbursements 242,000 –0– Cash balance, March 31, 2008 P242,000 Kimerald Corporation in Trusteeship Statement of Changes in Estate Equity March to 31, 2008 Estate equity, March Less:Loss on uncollectible receivables P 800 Loss on sale of inventories 33,200 Loss on sale of land and buildings .60,000 Loss on write off of intangibles 52,000 Administrative expenses ._16,400 P 40,000 Estate deficit, March 31 P122,400 _162,400 134 Chapter Entries on trustee's books: 2008 April: Mortgage payable 160,000 Cash To record payment of secured creditors from proceeds from sale of Land and buildings Administrative expenses payable-new 16,400 Deferred revenue 2,000 Wages payable 6,000 Cash To record payment of priority liabilities Accounts payable .32,000 Note payable-unsecured 25,600 Cash To record payment of P.32 per peso to unsecured creditors (available Cash of P57,600 divided by unsecured claims of P180,000) Accounts payable .68,000 Note payable-unsecured 54,400 Estate equity To write-off remaining liabilities and close trustee's records 160,000 24,400 57,600 122,400 ... be received by Wood 7- 14: a 7- 15: a 7- 16: b 7- 17: d _ P 23,940 19,200 4 ,74 0 78 % 3,6 97 _19,200 P 22,8 97 - P7,000 - P30,000 - P 57, 200 [52,000 + (8,000 X 65)] - P72,800 (112,000 X 65) 7- 18: d Estimated... deficiency 78 ,75 0 (336 ,70 0) (2 57, 950) ( 43 ,75 0) (301 ,70 0) 295 ,75 0 P( 5,950) 7- 25: b Notes payable ( 175 ,000 – 140,000) Unsecured liabilities (420,000 – 52,500) Total Free assets (1 57, 500 + 210,000)... 5,000 P 2 ,70 0 16,110 45,100 9,000 72 ,910 77 ,910 _6,500 P 71 ,410 2,500 103 ,75 0 ÷ P106,250 67% 7- 22: d Fully secured (Notes Payable) Partially secured: Notes Payable - PNB Add (2,500 X 67% ) Unsecured