NATIONAL UNIVERSITY - MANILA Advanced Financial Accounting & Reporting Review

College of Business and Accountancy 2. Corporate Liquidation

2. CORPORATE LIQUIDATION
Financial Rehabilitation and Insolvency Act (FRIA) of 2010 (RA 10142)
The rehabilitation or liquidation shall be made with a view to ensure or maintain certainty and
predictability in commercial affairs, preserve and maximize the value of the assets of these debtors,
recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors
who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to
facilitate a speedy and orderly liquidation of these debtor's assets and the settlement of their
obligations (Sec. 2).

Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and
solvency, if it is shown that its continuance of operation is economically feasible and its creditors can
recover by way of the present value of payments projected in the plan, more if the debtor continues as
a going concern than if it is immediately liquidated (Sec. 4(gg).

Liquidation under FRIA:

1. Voluntary Liquidation - An insolvent debtor may apply for liquidation by filing a petition
for liquidation with the court (Sec 90).
2. Involuntary Liquidation - Three (3) or more creditors the aggregate of whose claims is at
least either One million pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the
subscribed capital stock or partner's contributions of the debtor, whichever is higher, may
apply for and seek the liquidation of an insolvent debtor by filing a petition for liquidation of
the debtor with the court (Sec. 91).

Section 112. Liquidation Order. - The Liquidation Order shall:

(a) declare the debtor insolvent;

(b) order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;

(c) order the sheriff to take possession and control of all the property of the debtor, except those that
may be exempt from execution;

(d) order the publication of the petition or motion in a newspaper of general circulation once a week
for two (2) consecutive weeks;

(e) direct payments of any claims and conveyance of any property due the debtor to the liquidator;

(f) prohibit payments by the debtor and the transfer of any property by the debtor;

(g) direct all creditors to file their claims with the liquidator within the period set by the rules of
procedure;

(h) authorize the payment of administrative expenses as they become due;

(i) state that the debtor and creditors who are not petitioner/s may submit the names of other nominees
to the position of liquidator; and

1
NATIONAL UNIVERSITY - MANILA Advanced Financial Accounting & Reporting Review
College of Business and Accountancy 2. Corporate Liquidation

(j) set the case for hearing for the election and appointment of the liquidator, which date shall not be
less than thirty (30) days nor more than forty-five (45) days from the date of the last publication.

Section 113. Effects of the Liquidation Order. - Upon the issuance of the Liquidation Order:

(a) the juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated;

(b) legal title to and control of all the assets of the debtor, except those that may be exempt from
execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the
court;

(c) all contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator,
within ninety (90) days from the date of his assumption of office, declares otherwise and the
contracting party agrees;

(d) no separate action for the collection of an unsecured claim shall be allowed. Such actions already
pending will be transferred to the Liquidator for him to accept and settle or contest. If the liquidator
contests or disputes the claim, the court shall allow, hear and resolve such contest except when the
case is already on appeal. In such a case, the suit may proceed to judgment, and any final and executor
judgment therein for a claim against the debtor shall be filed and allowed in court; and

(e) no foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.

Section 129. The Liquidation Plan. - Within three (3) months from his assumption into office, the
Liquidator shall submit a Liquidation Plan to the court. The Liquidation Plan shall, as a minimum
enumerate all the assets of the debtor and a schedule of liquidation of the assets and payment of the
claims.

Statement of Affairs - is a financial statement that emphasizes liquidation values and provides
relevant information for the trustee in liquidating the debtor corporation.
Pointers to Remember:
1. A statement of position from a “quitting concern” point of view.
2. Assets are reported at estimated realizable values instead of book value.
3. Instead of being classified as current or noncurrent, assets are reported as pledged with
certain creditor groups or free and thus available to general creditors. Assets are
classified as:
a. Assets pledged to fully secured creditors - assets that have been pledged and are expected to
realize an amount equal to or in excess of the claims on which they have been pledged.
b. Assets pledged with partly secured creditors - assets that have been pledged but are
expected to realize less than the amounts of the claims on which they have been pledged.
c. Free assets - assets that have not been pledged and hence are not related to individual
liability items.
4. Liabilities are reported at the balance sheet amounts.
5. Liabilities are not classified as current or noncurrent, but are listed in terms of their legal
status or rank.
a. Creditors with Priority - creditors who must, by law, be provided for in full before anything
may be paid to the remaining unsecured creditors.
A.1. The costs and expenses of administration, including actual and necessary expenses of
preserving the debtor’s estate after filing the petition. Among these costs and expenses would be the
referee’s salary and expenses, filing fees, attorney’s fees and trustee’s fees, expenses of recovering
concealed or fraudulently transferred assets.

2
NATIONAL UNIVERSITY - MANILA Advanced Financial Accounting & Reporting Review
College of Business and Accountancy 2. Corporate Liquidation

Section 56.Treatment of Employees’ Claims. Compensation of employees required to carry on the

business shall be considered an administrative expense. Claims of separation pay for months worked
prior to the commencement date shall be considered a pre- commencement claim. Claims for salary
and separation pay for work performed after the commencement date shall be an administrative
expense.
A.2. Wages and commissions
A.3. Costs and expenses of creditors successful in having the confirmation of an arrangement
or wage-earner plan or bankrupt’s discharge refused, revoked, or set aside; or securing the conviction
of any person for a bankruptcy offense.
A.4. Taxes legally due and owing by a bankrupt to the Government or any of its subdivision
or instrumentalities.
A.5. Debts owing to any person entitled to priority by laws; and also rent for actual use and
occupancy.
b. Fully Secured Creditors - creditors who have been pledged with certain assets that are
expected to realize as much as or more than their respective claims.
c. Partly Secured Creditors - creditors who have been pledged certain assets that are expected
to realize less than their respective claims.
d. Unsecured Creditors - creditors who are without legal priority and who have been pledged
no assets.

Section 131. Sale of Assets in Liquidation. - The liquidator may sell the unencumbered assets of the
debtor and convert the same into money. The sale shall be made at public auction. However, a private
sale may be allowed with the approval of the court if; (a) the goods to be sold are of a perishable
nature, or are liable to quickly deteriorate in value, or are disproportionately expensive to keep or
maintain; or (b) the private sale is for the best interest of the debtor and his creditors.

With the approval of the court, unencumbered property of the debtor may also be conveyed to a
creditor in satisfaction of his claim or part thereof.

Statement of Realization and Liquidation - an activity statement that is intended to show progress
towards the liquidation of a debtor’s estate.

Problem 1
Explain how each of the item below will appear on statement of affairs:

1. Estimated liquidation costs, P2,500.

2. First mortgage bonds, P25,000, upon which interest of P300 is accrued, secured by land and
building, book value P40,000, estimated to realize P30,000.
3. Land and buildings pledged to holders of bonds in Number 2.
4. Deficit, P5,000.
5. Cash overdraft, P1,500.
6. Probable judgments on damage suits pending, P5,000.
7. Taxes payable, P350.
8. Goodwill, P20,000 upon which it is believed nothing will be realized.
9. Goods in process, book value P15,000, estimated to realize P16,000 after additional costs of
completion estimated at P1,500.
10. Notes Receivable, P15,000.

3
NATIONAL UNIVERSITY - MANILA Advanced Financial Accounting & Reporting Review
College of Business and Accountancy 2. Corporate Liquidation

11. Notes receivable, P20,000, upon which interest of P600 is accrued; notes are estimated to be
80% collectible; one-half of the notes are pledged to notes payable of P10,000 on which
interest of P400 is accrued.
12. Notes payable secured by notes receivable in number 11.
13. Patents, previously written-off against retained earnings but estimated to realize P5,000.
14. Wages payable, P800.

Problem 2
The following balances are found in the general ledger of MXN Corporation on March 1, 2018:

Accounts payable 167,500.00

Accounts receivable 62,500.00
Share Premium 20,000.00
Allowance for bad debts 5,000.00
Allowance for depreciation - Buildings 40,000.00
Allowance for depreciation - Mach and Eqpt 70,000.00
Buildings 105,000.00
Ordinary Shares 200,000.00
Cash 15,750.00
Deficit 71,750.00
Goodwill 50,000.00
Inventories 115,000.00
Investments 45,000.00
Land 52,500.00
Machinery and equipment 125,000.00
Mortgage payable, secured by land and building 100,000.00
Notes payable 40,000.00

The books do not show the following accruals: wages, P850; taxes, P2,000; interest on notes, P1,250;
interest on mortgage, P2,500. The investments have a market value of P27,500 and have been pledged
as security to holders of the notes. An offer has been received for land and buildings P125,000 and for
machinery and equipment of P15,000. It is estimated that inventories will realize P85,000 after their
completion, which will require additional costs of P12,500. It is estimated that 15% of the accounts
receivable will prove uncollectible. Expenses of liquidation are estimated at P15,000.
Required:
Prepare statement of affairs.

Problem 3
The statement of financial position of Slim Corporation appeared as follows on March 1, 2018:

4
NATIONAL UNIVERSITY - MANILA Advanced Financial Accounting & Reporting Review
College of Business and Accountancy 2. Corporate Liquidation

Assets
Cash 2,000.00
Accounts receivable, net 4,000.00
Inventories 18,000.00
Land 10,000.00
Buildings, net 50,000.00
Intangible assets 13,000.00
Total Assets 97,000.00

Liabilities and Shareholders' Equity

Accounts payable 25,000.00
Notes payable - unsecured 20,000.00
Revenue received in advance 500.00
Wages payable 1,500.00
Mortgage payable 40,000.00
Share Capital 20,000.00
Accumulated Surplus (10,000.00)
Total Liabilities and Shareholders' Equity 97,000.00

1. Creditors failed to elect a trustee and, accordingly, the interim trustee became trustee for the
case.
2. The land and building are pledged as security for mortgage payable.
3. In January 2018, Slim received P500 from a customer as a payment in advance for
merchandise that is no longer marketed.
4. Activities of the trustee during March are summarized as follows:
a. P3,800 is collected on the receivables.
b. Inventories are sold for P9,700.
c. Land and building bring a total of P45,000.
d. Nothing is realized from the intangible assets.
e. Administrative expenses incurred by the trustee is P4,100.

Required:
1. Prepare statement of affairs.
2. Prepare journal entries on the trustee’s books.
3. Prepare statement of realization and liquidation.

5
NATIONAL UNIVERSITY - MANILA Advanced Financial Accounting & Reporting Review
College of Business and Accountancy 2. Corporate Liquidation

Multiple Choice Problems

1. P Corporation is a parent, having purchased 60% of S Company’s ordinary shares at par value
for P600,000. S Company is in financial difficulty. The parent granted as unsecured loan
amounting P200,000 to the subsidiary. An accounting statement of affairs for S Company
shows a dividend of 30%. P Corporation can expect to receive payment for its Investment in S
Company of approximately:
a. P600,000 c. P108,000
b. P180,000 d. 0
2. Blueprint Inc. signed a note payable to its bank for P10,000. Accrued interest on the note on
February 28, 2018 amounts to P250. the note is secured by inventory with a book value of P12,000.
The inventory is sold for P8,000 and unsecured creditors receive 30% of their claims. The bank
should receive the following amount in settlement of the note and interest:
a. P10,250 c. P8,675
b. P10,000 d. P8,000
3. The trust of Ardolio Inc. prepares a statement of affairs which shows that unsecured creditors
whose claims total P60,000 may expect to receive approximate P36,000 if assets are sold for the
benefit of creditors.
❏ Michael is an employee who is owed P750.
❏ Meldcan holds a note of P1,000 on which interest of P50 is accrued; nothing has been pledged
on the note.
❏ Campboy holds a note P6,000 on which interest of P300 is accrued; securities with a book
value of P6,500 and a present market value of P5,000 are pledged on the note.
❏ Serpor holds a note of P2,500 on which interest of P150 is accrued; property with a book
value of P2,000 and a present market value of P3,000 is pledged on the note.
How much each of the following creditors hope to receive?
Michael Meldcan Campboy Serpor
a. 0 0 0 0
b. 90 0 6,300 2,390
c. 350 1,050 5,780 0
d. 750 630 5,780 2,650
4. Erap Co. filed a voluntary bankruptcy petition on March 1, 2018, and the statement of affairs
reflects the following amounts:

Book Value Realizable Value

Assets
Assets pledged to fully secured creditors 300,000.00 370,000.00
Assets pledged to partially secured creditors 180,000.00 120,000.00
Free assets 420,000.00 320,000.00
900,000.00 810,000.00

Liabilities
Liabilities with priority 70,000.00

6
NATIONAL UNIVERSITY - MANILA Advanced Financial Accounting & Reporting Review
College of Business and Accountancy 2. Corporate Liquidation

Fully secured creditors 260,000.00

Partially secured creditors 200,000.00
Unsecured creditors 540,000.00
1,070,000.00

Assume that assets are converted to cash at the estimated current values and the business is liquidated.
What amount of cash will be available to pay unsecured nonpriority claims?
a. P240,000 c. P320,000
b. P280,000 d. P360,000
5. Zamora and Co. purchased a Cadillac automobile with little cash down and signed a note, secured
by Cadillac, for 48 easy monthly installments. When the company files for bankruptcy, the balance
due on the Cadillac amount to P6,000,000. The car has a book value of P8,000,000 and a net
realizable value of P4,000,000. The unsecured creditors of Zamora and Company can expect to
receive 50% of their claims. In the liquidation, the bank that holds the note on Cadillac should
receive:
a. P6,000,000 c. P4,000,000
b. P5,000,000 d. P3,000,000