2. Statement of Affairs
It is prepared under a quitting-concern assumption and makes the
following classifications as to assets and liabilities:
Assets:
(1) Pledged with Fully Secured Creditors – estimated cash proceeds is
equal to or more than the amount of the secured claim.
(2) Pledged with Partially Secured Creditors – estimated cash proceeds
is less than the amount of the secured claim.
(3) Free Asset – any asset of the entity that has not been used to
secure the payment of any of the company’s liabilities and therefore
any cash proceeds therefrom is available to unsecured creditors.
3. Liabilities
(1) Secured Liabilities – that which is covered by a collateral asset
(a) Fully-secured – the realizable value of the pledged asset is at
least equal to the amount of the claim.
(b) Partially-secured liabilities – the realizable value of the
pledged asset is less than the amount of the claim. Every partially
secured claim has a secured portion, which is covered by the realizable
value of the collateral and an unsecured portion, that which is not
covered.
(2) Unsecured Liabilities – that which is not covered by a pledged asset.
(a) Unsecured liabilities with priority – those that are specified
under the Bankruptcy Law that must be paid in full ahead of any other
type of unsecured liabilities.
(b) Unsecured liabilities without priority – is any other type of
unsecured liability
4. Unrecorded assets with market values are included in the statement of
affairs under free assets category and are called contingent assets;
unrecorded administrative and liquidation expenses are categorized as
unsecured with priority, and are called contingent liabilities. The
statement of affairs measures in estimated terms what payments are to
be received by the different types of creditors in the event of
liquidation.
5. Estimated cash available(Cash on Hand plus Realizable values of all assets) Px
Less prioritized claims:
Fully secured creditors Px
Secured portion of partially-secured Creditors x
Unsecured creditors with priority x (x)
(a) Net cash available to unsecured amount Px
Less (b) Unsecured amounts:
Unsecured portion of partially secured Creditors Px
Unsecured creditors without priority x (x)
Estimated deficiency to creditors P(x)
The estimated recovery rate for unsecured
Amounts: (a)/(b) = ERR%
6. Another method of estimating the amount of deficiency to unsecured
creditors without priority
Estimated loss on sale of non-cash assets PX
Plus contingent liabilities X
Estimated gross loss PX
Less: Estimated gain on sale of non-cash Assets PX
Plus contingent assets X (X)
(x) Estimated net loss P(X)
(y) Compare with carrying value of SHE X
• IF (x) and (y) are equal amounts, available cash covers exactly outstanding
liabilities; no deficiency to creditors AND no amount is recoverable by
stockholders.
• IF (x) is more than (y), the peso amount difference is an Estimated
Deficiency to creditors.
• IF (x) is less than (y), the peso amount difference is an estimated amount
recoverable by Stockholders.
7. Accounting and Reporting by the Trustee
The trustee is required to prepare the following periodic statements
and reports:
(a) Cash receipts and disbursements statement,
(b) a Statement of Estate Equity; and
(c) supporting exhibits of assets still held and liabilities not yet
liquidated as at the end of the reporting period (balance sheet). The
Statement of Realization and Liquidation could also be required.
8. The following information is available on September 20, 2023, for BRAND and NEW COMPANY, which is
having difficulty in paying its liabilities as they become due:
Carrying Amount
Cash P 6,881
Accounts receivable, net, fair value equal to carrying amount 79,135
Inventories, current fair value , P30,966 pledged on P36,127 of notes payable 67,093
Machinery and equipment, net, current fair value of P115,950 pledged on
mortgage note payable 184,075
Office supplies, current fair value of P4,301 3,440
Total Assets P340,624
Wages payable 9,978
Taxes payable 2,065
Accounts payable 103,219
Notes payable, P36,127 of which is secured by inventories 68,813
Mortgage note payable 86,704
Common stock, P10 par 172,032
Retained earnings, deficit 102,187
Total Liabilities and Equity P340,624
Additional information:
(1) Estimated liability to the trustee is P44,728.
(2) A delivery van previously given to the supervisor was returned to the company, fair market value,
P43,008.
REQUIRED:
a. Prepare a statement of affairs as of September 20, 2024.
b. Compute the estimated recoverable amounts to the different types of creditors in the event of
liquidation.
c. Prepare a statement of deficiency to unsecured creditors at September 20, 2024
9. The balance sheet of BIGBOY ENTERPRISES at June 10, 2023 follows. At this date an interim trustee
was appointed by the court to assume control of BIGBOY’s estate and liquidate the distressed
corporation.
Cash P 15,360
Accounts receivable 30,720
Inventories 138,240
Land 76,800
Buildings, net 384,000
Intangible assets 99,840
Total P744,960
Accounts payable P 192,000
Notes payable 153,600
Deferred revenue 3,840
Wages payable 11,520
Mortgage note payable 307,200
Capital stock 153,600
Retained earnings, deficit (76,800)
Total P744,960
10. Additional information:
1. The land and the buildings are pledged as security for the mortgage payable.
2. in June, 2023, BIGBOY received P3,840 from a customer as payment in advance for
merchandise that is no longer marketed and thus can no longer be provided.
3. Activities of the trustee during June are summarized as follows:
a. P27,648 is collected on the receivables.
b. b. Inventories are sold for P74,496.
c. c. Land and buildings bring total of P384,000.
d. d. Nothing is realized from the intangible assets.
e. e. Administrative expenses of P31,488 are incurred by the trustee.
REQUIRED:
1. Prepare journal entries in the books of the trustee and in the books of the distressed company
for the above transactions.
2. 2. Prepare a statement of realization and liquidation using the conventional method..