QUIZ 02 Corporate Liquidation

Multiple Choice
Identify the choice that best completes the statement or answers the question.

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When LACUNA COMPANY filed for liquidation with the Securities and Exchange Commission, it prepared the
following balance sheet.
Current assets, net realizable value, P110,000..................P80,000
Land and buildings, fair value, P180,000.........................200,000
Goodwill, fair value, P0...................................................... 40,000
Total assets..................................................................... P320,000
Accounts payable...........................................................P160,000
Mortgage payable, secured by
land and building.........................................................200,000
Common stock..................................................................100,000
Retained earnings, deficit.............................................. ( 140,000)
Total equities.................................................................. P320,000

1. What is the estimated deficiency to unsecured amounts?

a. P90,000 c. P192,000
b. P140.000 d. P70,000
2. If the value of the pledged property is lesser than the obligation, what is the treatment of the liability?
a. Collateralized. c. Fully secured.
b. Unsecured. d. Partially secured.
3. Philippine National Bank holds a P500,000 note secured by a building owned by Luigi Software, which has filed
for bankruptcy. If the property has a book value of P600,000 and a fair market value of P450,000, what is the best
way to describe the notes held by Philippine National Bank? The bank has:
a. An unsecured claim of P500,000.
b. A secured claim of P500,000.
c. A secured claim of P450,000 and an unsecured claim of P50,000.
d. A secured claim of P50,000 and an unsecured claim of P50,000.

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The following data were taken from the statement of affairs of MARACLARA 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

4. The amount to be paid to unsecured creditors:

a. P78,200 c. P72,800
b. P72,000 d. P70,800
5. The amount to be paid fully secured creditors is:
a. P20,000 c. P32,000
b. P30,000 d. P35,000
 6. The amount that will be paid to creditors with priority is:
a. P7,000 c. P6,000
b. P7,500 d. P6,200
7. An accounting statement of affairs of a corporation in financial difficulty indicates that unsecured creditors would
receive P0.40 on the peso, Which one of the following assets is most likely to realize the smallest percentage of its
book value?
a. Inventories c. Accounts receivable.
b. Goodwill d. Plant and equipment.
8. Harry Company filed a voluntary bankruptcy petition on July 15, 2003 and the statement affairs reflects the
following amounts:
Book Estimated
Carrying Amount Current Value
Assets
Assets pledged with fully secured creditors....................P160,000..........P190,000
Assets pledged with partially secured creditors .................90,000..............60,000
Free assets .......................................................................200,000............140,000
Liabilities
Liabilities with priority ......................................................20,000
Fully secured creditors......................................................130,000
Partially secured creditors.................................................100,000
Unsecured creditors..........................................................260,000
Assume that the assets are converted into cash at the estimated current values and the business is liquidated.
What total amount of cash should partially secured creditors receive?
a. P100,000 c. P90,000
b. P60,000 d. P84,000
9. Mack Corp Company filed a voluntary bankruptcy petition on August 15, 2007 and the statement of affairs reflect
the following amounts
Book Estimated
Carrying Value Current Value
Assets pledged with fully secured creditors....................P250,000..........P925,000
Assets pledged with partially secured creditors................450,000............300,000
Free assets...................................................................... 1,050,000............800,000
P2,250,000 P2,025,000
Liabilities
Liabilities with priority...................................................P175,000
Fully secured creditors......................................................650,000
Partially secured creditors.................................................500,000
Unsecured creditors....................................................... 1,350,000
P2,765,000
Assumes that the assets are converted into cash at the estimated current value and the business is liquidated. How
much is the estimated deficiency?
a. P625,000 c. P475,000
b. P900,000 d. P650,000
10. On December 30, 2003, Hale Corp. paid $400,000 cash and issued 80,000 shares of its $1 par value common stock
to its unsecured creditors on a pro rata basis pursuant to a reorganization plan under Chapter 11 of the bankruptcy
statutes. Hale owed these unsecured creditors a total of $1,200,000. Hale’s common stock was trading at $1.25 per
share on December 30, 2003. As a result of this transaction, Hale’s total stockholders’ equity had a net increase of
a. $ 800,000 c. $1,200,000
b. $ 80,000 d. $ 100,000
11. The primary difference between a balance sheet and an accounting statement of affairs is that:
a. Liabilities are arranged in a different sequence.
b. Assets are arranged in a different sequence.
c. Owners' equity is not considered in the statement of affairs.
d. A balance sheet reflects book values, while a statement of affairs emphasizes realization
values.
12. ABC Corporation has become insolvent and a statement of affairs is being prepared. The following figures on a
statement of affairs are condensed as follows:
Assets Liabilities
Pledged with fully secured creditors..........P71,000 With priority.......................P3,000
Pledged with partially secured creditors.......12,500 Fully secured......................60,000
Free..............................................................11,000 Unsecured w/o priority.......18,000
The estimated deficiency to unsecured creditors (without priority) is:
a. P6,500 c. P12,500
b. P5,000 d. P15,500
13. An arrangement for creditors to accept an amount less than the amount owed to them is referred to as a
a. Charge and discharge agreement. c. Bankruptcy agreement.
b. Composition agreement. d. Chandler agreement.
14. The ratio called "dividend to general unsecured creditors" is calculated by which of the following formulas?
a. Estimated realizable value of all debtor assets divided by Book value of debtor assets
b. Estimated amount available for unsecured creditors with/without priority divided by Total
claims of all unsecured creditors with/without priority
c. Net estimated proceeds available to unsecured creditors without priority divided by Total
claims of unsecured creditors without priority.
d. Estimated gain/loss on liquidation divided by Total estimated net realizable value of
debtor assets
15. In a liquidation proceeding, if the proceeds on the realization of an asset exceed the lien against that asset, the
excess is assigned to
a. Other lien holders whose assets will not realize a sufficient amount to cover their liens.
b. The holder of the lien.
c. The stockholders of the corporation.
d. Meet the claims of the unsecured creditors.
16. The following data are provided by ABC Corp. which is undergoing liquidation process:
i Total liabilities amounts to P692.000. 35% is secured by assets amounting to P270.000 with a FMV of
P250.O00; 40% is-secured by assets amounting to P300.000 with-a FMV of P225.000.
ii Total assets amounts to P890.000 and has a total fair market value P695.000.
iii Unpaid income taxes amounts to P35,000. Additional salaries payable and administrative expenses totaled
P28.000.
How much is the estimated deficiency to unsecured liabilities?
a. P72,000 c. P60,000
b. P54,000 d. P48,000
17. Amounts related to the statement of affairs of windup Company, in bankruptcy liquidation on April 1, 2005, were
as follows:
Assets pledged for fully secured liabilities......................P 80,000
Assets pledged for partially secured liabilities....................50,000
Free assets........................................................................272,000
Fully secured liabilities.......................................................60,000
Partially secured liabilities..................................................80,000
Unsecured liabilities with priority......................................40,000
 Unsecured liabilities without priority...............................330,000
Compute the: (1) total estimated deficiency to unsecured creditors, and (2) the costs per peso that unsecured
creditors may expect to receive from Windup Company.
a. (1) P 78,000; (2) P.76 c. (1) P158,000; (2) P.61
b. (1) P108,000; (2) P.70 d. (1) P108,000; (2) P.81
18. The ELI Corporation is undergoing liquidation and its statement of financial position as of January 2, 2013 is as
follows:
ELI Corporation
Statement of Financial Position
As of January 2, 2013
Assets...................................................... Liabilities and Equity
Cash........................................P 124,200 Accounts Payable..........................P 118,500
Receivables, net.........................340,800 Salaries Payable..................................50,000
Inventory......................................70,000 Bank Loan Payable...........................222,000
Prepaid Expenses.........................22,500 Note Payable......................................80,000
Building, net...............................360,000 Bonds Payable..................................450,000
Goodwill......................................82,000 Ordinary Shares................................120,000
................................................................ Capital Deficit.................................. (41,000)
Total Assets............................. P 999,500 Total Liabilities and Equity...........P 999,500

The inventory has a realizable value of P53,000. Of the accounts payable, P60,000 is secured by 1/4 of the
receivable which is 30% not collectible. The balance in the book value of the receivables which has a realizable
value of P235,000 is used to secure the bank loan payable. The bonds payable is secured by the building having a
book value of P360,000 and a realizable value of P375,000.
Unrecognized liabilities as of Jan. 2, 2013 are as follows: accrued interest on bonds payable and taxes amounting
to P4,000 each, and trustee’s salary amounting to P9,500. (Use two decimal places for the recovery percentage)
How much will be paid to the partially secured creditors of ELI corporation?
a. P477,595 c. P479,102
b. P480,669 d. P478,349
19. A special-purpose statement prepared to show financial condition of an insolvent business is the
a. Statement of Affairs c. Realization & Liquidation Account
b. Deficiency Statement d. Charge & Discharge Account
20. Which of the following is not a general objective of bankruptcy procedures?
a. attempt to give the debtor a fresh start
b. assurance that all obligations of the debtor will be satisfied completely
c. assurance of an equitable distribution of the debtor's property among creditors
d. None of the above is a general objective.
21. The unsecured creditors of RR Corporation filed voluntary bankruptcy petition on July 1, 2003. The court order for
relief was granted on July 10 at which time an interim trustee was appointed to supervise liquidation of the
corporation. A listing of assets and liabilities of RR Corporation as of July 10, 2003, along with estimated
realizable value is as follows:
Book value Estimated
Current Value
Cash ....................................................................P80,000.........................P80,000
Accounts receivable – net ...................................210,000.........................160,000
Inventories ..........................................................200,000.........................210,000
Equipment – net ..................................................150,000...........................60,000
Land and buildings – net......................................250,000.........................140,000
Intangible assets .................................................... 10,000......................................
 ........................................................................... P900,000.......................P650,000
Accounts payable...............................................P350,000
Notes payable......................................................100,000
Wages payable (June and July)..............................24,000
Taxes payable......................................................126,000
Mortgage payable P200,000, plus P5,000
unpaid Interest on July 10 ..............................205,000
Capital stock .......................................................300,000
Retained earnings (deficit) ...............................(205,000)
P900,000
Additional information:
1 Accounts receivable are pledged as security for the notes payable.
2 No more than P1,000 is owed to any employee.
3 Taxes payable are a priority item.
4 The mortgage payable and interest are secured by land and buildings.
5 Trustee fees and other costs of liquidating the estate are expected to be P11,000.
Determine the expected return on the peso for unsecured nonpriority claims:
a. P0.62 c. P0.98
b. P0.60 d. P0.75
22. The following were taken from the statement of affairs of NOWAYOUT COMPANY.
Assets pledged with fully secured creditors.....................P56, 800
Assets pledged with partially secured creditors.................10, 000
Free assets...........................................................................8, 960
Preferred creditors...............................................................2, 400
Fully secured creditors.......................................................55, 200
Partially secured creditors..................................................16, 000
Unsecured creditors without priority.................................14, 400
The estimated amount recoverable by Partially-secured creditors is
a. P11,160 c. P12,400
b. P12,240 d. P11,600

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GREEN BERET, INC. is very financially distressed and the Securities and Exchange Commission ordered its
prompt liquidation. The company has the following assets at this point:
Book Value Fair Value
Current assets...................................................................P64,000............P28,000
Land...................................................................................80,000..............72,000
Buildings............................................................................56,000..............61,600
Equipment..........................................................................24,000..............26,400
The company's liabilities at the same date are as follows:
Income taxes......................................................................P 6,400
Notes payable, secured by land...........................................96,000
Accounts payable................................................................68,000
Salaries payable....................................................................4,800
Bonds payable....................................................................56,000
Administrative expenses for liquidation.............................16,000

23. Calculate the estimated net amount available for the payment of all unsecured creditors
a. P88,800 c. P86,400
b. P109,600 d. P100,000
24. A company is to be liquidated and has the following liabilities:
Income taxes......................................................................P 8,000
Notes payable (secured by land).......................................120,000
Administrative expense......................................................20,000
Accounts payable................................................................83,000
Salary payable (evenly to two employees)............................6,000
Bonds payable....................................................................70,000
The 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
How much will the holders of notes payable collect following the liquidation?
a. P108,000 c. P83,000
b. P120,000 d. P90,000
25. In the accounting statement of affairs, the gains or losses upon liquidation would equal
a. total estimated realizable value of assets minus the amount remaining for Class 7
unsecured creditors.
b. net book value of assets minus book value of liabilities.
c. total estimated realizable value of assets minus the amount assigned to secured creditors.
d. the book value of assets minus their realizable value.
26. If a dividend of 80% is allocable to Class 7 unsecured creditors based on an accounting statement of affairs, it
correctly may be concluded that
a. All unsecured claims will receive the same percentage of return.
b. Stockholders will receive 20% of their equity.
c. Class 1 through 6 unsecured claims will be paid in full.
d. All unsecured claims will be paid in full.
27. The following information is taken from the statement of affairs of the Nanette Company:
Assets pledged with fully secured creditors (current fair value, P75,000)...............P90,000
Assets pledged with partially secured creditors (current fair value, P52,000)...........74,000
Free assets (current fair value, P40,000)...................................................................70,000
Liabilities with priority...............................................................................................7,000
Fully secured creditors..............................................................................................30,000
Partially secured creditors.........................................................................................60,000
Unsecured creditors.................................................................................................112,000
Compute the (1) total estimated deficiency to unsecured creditors, and (2) the expected recovery per peso of
unsecured claims;
a. (1) P42,000; (2) P.70 c. (1) P-0-; (2) P.65
b. (1) P3,000; (2) P.98 d. (1) P42,000; (2) P.65
28. A special-purpose statement prepared to show financial condition of an insolvent business is the
a. Statement of Affairs c. Realization & Liquidation Account
b. Charge & Discharge Account d. Deficiency Statement
29. River Corporation is being liquidated. The trustee has determined that the unsecured claims will receive P0.50 on
the peso. Denon Corporation holds a P100,000 mortgage note receivable from River that is secured by marketable
securities with a P75,000 book value and an P82,000 fair value.
How much of the mortgage receivable will be recovered by Denon?
a. P87,500 c. P94,500
b. P84,000 d. P91,000
30. Kamy Corp. is in liquidation under Chapter 7 of the Federal Bankruptcy Code. The bankruptcy trustee has
established a new set of books for the bankruptcy estate. After assuming custody of the estate, the trustee
discovered an unrecorded invoice of $1,000 for machinery repairs performance before the bankruptcy. What
amount should be debited to estate equity as a result of these transactions?
a. $1,000 c. $9,000
b. $8,000 d. $0