STRAIGHT PROBLEMS

Problem 1: The Statement of Affairs by the court to assume control of SAN PEDRO’s estate and
The following information is available on June 10, 2020, liquidate the distressed corporation.
for TOWN and COUNTRY COMPANY, which is having
difficulty in paying its liabilities as they become due: Cash P 25,600
Accounts receivable 51,200
Carrying Amount
Inventories 230,400
Cash P 11,469
Land 128,000
Accounts receivable, net, fair value
Buildings, net 640,000
equal to carrying amount 131,891
Intangible assets 166,400
Inventories, current fair value ,
Total P1,241,600
P51,610 pledged on P60,211 of notes
Accounts payable P 320,000
payable 111,821
Notes payable 256,000
Machinery and equipment, net,
Deferred revenue 6,400
current fair value of P193,250
Wages payable 19,200
pledged on mortgage note payable 306,791
Mortgage note payable 512,000
Office supplies, current fair value of
Capital stock 256,000
P7,168 5,734
Retained earnings, deficit (128,000)
Wages payable 16,630
Total P1,241,600
Taxes payable 3,441
Accounts payable 172,032
Additional information:
Notes payable, P60,211 of which is
1. The land and the buildings are pledged as security for
secured by inventories 114,688
the mortgage payable.
Mortgage note payable 144,507
2. In June, 2020, SAN PEDRO received P6,400 from a
Common stock, P10 par 286,720
customer as payment in advance for merchandise that
Retained earnings, deficit 170,312
is no longer marketed and thus can no longer be
provided.
3. Activities of the trustee during June are summarized as
follows:
Additional information:
a. P46,080 is collected on the receivables.
(1) Estimated liability to the trustee is P74,547.
b. Inventories are sold for P124,160.
(2) A delivery van previously given to the supervisor was
c. Land and buildings bring total of P640,000.
returned to the company, fair market value, P71,680.
d. Nothing is realized from the intangible assets.
e. Administrative expenses of P52,480 are incurred
REQUIRED:
by the trustee.
a. Prepare a statement of affairs as of June 10, 2020.
b. Compute the estimated recoverable amounts to the REQUIRED:
different types of creditors in the event of liquidation. 1. Prepare journal entries in the books of the trustee and
c. Prepare a statement of deficiency to unsecured in the books of the distressed company for the above
creditors at June 10, 2020. transactions.
2. Prepare a statement of realization and liquidation using
Problem 2: Estate Accounting
the conventional method..
The balance sheet of SAN PEDRO ENTERPRISES at July 31,
3. Discuss briefly and illustrate how the realization of
2020 follows. At this date an interim trustee was appointed
non-cash asset is accounted for under the book value
method.

MULTIPLE CHOICE

The following were taken from the statement of affairs of Liabilities with priority 33,600
GREENFIELD COMPANY. Unsecured creditors 160,000
Assets pledged with fully secured P56,800 2. In the event of liquidation at this point, how much is
creditors the estimated amount recoverable by partially-secured
Assets pledged with partially secured 10,000 creditors?
creditors a. P104,000 c. P 59,200
Free assets 8,800 b. P 40,000 d. P160,000
Preferred creditors 2,400
Fully secured creditors 55,200 The summarized Statement of Realization and Liquidation
Partially secured creditors 16,000 for BLUEFACE CORPORATION for 2020 follows:.
Unsecured creditors without priority 14,400 Assets to be P48,000 Liabilities P40,000
1. The estimated deficiency to unsecured creditors is realized assumed
a. P 4,000 c. P12,400 Assets 32,000 Liabilities not 52,000
b. P10,000 d. P11,600 acquired liquidated
Assets realized 44,000 Supplementary 88,000
YELLOW-LEG, INC. has had severe financial difficulties and credits
is considering the possibility of liquidation. At this time, Liabilities to be
the distressed company has the following assets (stated at liquidated 64,000
net realizable value) and liabilities: Retained earnings decreased by P9,600 during the year.
Assets (pledged against debts of P 92,800 The ending balances of ordinary shares and retained
P56,000) earnings are P80,000 and P(60,000), respectively.
Assets (pledged against debts of 40,000 3. The beginning balance of cash is
P104,000) a. P45,600 c. P60,000
Other assets 64,000

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 b. P52,000 d. P44,800 BROWN RED, INC. a closely-held corporation was undergoing
liquidation. The total cash value of BROWN RED’s bankruptcy
The following information is available concerning KELSO estate after the sale of all assets and payment of
INC. on the date the company entered bankruptcy administrative expenses is P192,000.
proceedings:
BROWN RED has the following creditors:
• Fracon Bank is owed P96,000 on a mortgage loan secured
Account Balance per Books
by BROWN RED’s real property. The property was valued
Cash P2,929 at and sold, in bankruptcy, for P89,600.
Accounts receivable 53,514 • The BUREAU of INTERNAL REVENUE has a P15,360
Inventory 28,672 recorded judgment for unpaid corporate income tax.
Prepaid expenses 440 • JOG Office Supplies has an unsecured claim of P3,840
Buildings, net 52,416 that was timely filed.
Equipment, net 13,734 • Nanstar Electric Company has an unsecured claim of
Goodwill 5,786 P12,800 that was timely filed.
Wages payable (6,560) • Liquid Corporation is owed P64,000 in a loan contract
Taxes payable (5,854) secured by BROWN RED’s notes receivable which realized
Accounts payable (40,408) P76,800.
Notes payable (24,000) • Decoy Publications has a claim of P20,480, which is
Common stock (97,730) secured by BROWN RED’s inventory that was valued and
Retained earnings, Deficit 17,061 sold, in bankruptcy, for P2,560. The claim was timely
filed.
The inventory secures the notes payable. 7. Calculate the total amount recoverable by partially-
Administrative and liquidation expenses are estimated secured creditors:
at P53,805. a. P0 c. P 104,320
b. P8,320 d. P 15,360
Expected realizable values of the assets are:
Accounts receivable P45,158 8. Calculate the total amount recoverable by unsecured
Inventory 18,944 creditors with priority:
Buildings 44,128 a. P 64,000 c. P 104,320
Equipment 10,374 b. P 8,320 d. P 15,360
4. Calculate the estimated amount recoverable by the
9. Calculate the total amount recoverable by fully secured
holders of the notes payable in the event of
creditors:
liquidation.
a. P 64,000 c. P104,320
a. P 22,269 c. P 18,942
b. P 4,160 d. P 15,360
b. P 21,498 d. P 22,989
10. Calculate the total amount recoverable by unsecured
Items 5 and 6 are based on the following: creditors without priority:
Because of inability to pay its debts, the MINOR BLUE a. P0 c. P11,520
MANUFACTURING COMPANY has been forced into bankruptcy b. P8,320 d. P 15,360
as of April 30, 2020. The balance sheet on that date shows:
ASSETS CLARET CORPORATION, a financially distressed company, is
Cash P 3,456 to be liquidated and has the following liabilities:
Accounts Receivable 50,368 Income taxes P 12,800
Notes Receivable 23,680 Notes payable, secured by land 192,000
Inventories 112,448 Accounts payable 132,800
Prepaid expenses 1,216 Salary payable, evenly to two employees 9,600
Land and building 78,400 Bonds payable 112,000
Equipment 62,464 Administrative expenses for liquidation 32,000
P 332,032
LIABILITIES
Accounts payable P 67,200 The said company has the following assets:
Notes payable 84,800 Book value Fair value
Accrued wages 2,368 Current assets P 102,400 P 54,080
Accrued taxes 5,952 Land 128,000 144,000
Mortgage bond payable 115,200 Building and equipment 128,000 176,000
Common stock – P20 par 96,000
Retained earnings (39,488)
P 332,032 11. How much will the holders of notes payable collect
Additional information: following the liquidation?
a. Accounts receivable of P27,120 and notes receivable of a. P172,800 c. P132,800
P20,000 are expected to be collectible. The good notes b. P144,000 d. P192,000
are pledged to P24,000 of the notes payable.
b. Inventories are expected to bring in P72,160 when sold The LEMON COMPANY has the following data in connection
under bankruptcy condition. with its bankruptcy petition with the Securities and Exchange
c. Land and buildings have an appraised value of 152,000. Commission at the end of 2020.
they serve as security on the bonds.
d. The current value of the equipment, net of disposal cost Liabilities without priority P 368,000
is P14,400. Liabilities with priority 176,000

5. What is the estimated payment to all creditors? Secured liabilities

a. P 131,200 c. P 152,000 Debt 1, P336,000; value of pledged asset P 288,000
b. P 275,520 d. P 232,000 Debt 2, P272,00, value of pledged asset P 160,000
Debt 3, P192,000, value of pledged asset P 224,000
6. Calculate the estimated total amount recoverable on the
notes payable. The company also has a number of other assets that are not
a. P 57,664 c. P 18,176 pledged in any way. The creditors holding Debt 2 want to
b. P 84,800 d. P 62,784 receive at least P227,200.

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12. For how much do these free assets have to be sold so Not realized 1,760,000
that Debt 2 would receive exactly P227,200? Liabilities:
a. P 492,800 c. P544,000 Liquidated 2,400,000
b. P 316,800 d. P460,800 Not liquidated 2,176,000
To be liquidated 2,880,000
MELSIMS HATCH, INC. is undergoing liquidation since August Assumed 2,080,000
1, 2020. Five months later, on December 31, 2020, its Supplementary:
condensed realization and liquidation statement shows the Charges 4,000,000
following: Credits 3,744,000
Assets:
To be realized P1,760,000 13. The net gain (loss) for the five-month period is:
Acquired 960,000 a. P(416,000) c. P 544,000
Realized 1,536,000 b. P 320,000 d. P 704,000

PROBLEM I STATEMENT OF AFFAIRS – TOWN

and COUNTRY
Book Value Assets Est. RV Est. AA Gain( Loss)
Pledged with FSC:
306,791 Machinery and equipment 193,250 (113,541)
Less Mortgage note payable 144,507 48,743

Pledged with PSC:

111,821 Inventories (deducted contra) 51,610 - (60,211)
Free Assets:
11,469 Cash 11,469 11,469 -
131,891 Accounts receivable 131,891 131,891 -
5,734 Office supplies 7,168 7,168 1,434
- Delivery van 71,680 71,680 71,680
Estimated Net Loss ( 100,638)
Estimated Total Amount for Unsecured Creditors 270,951
Less: claims with priority (see contra) 94,618
Estimated net amount for claims w/o priority 176,333
Estimated deficiency to claims w/o priority 58,777
567,706 235,110

Unsecured
Book Value Liabilities Amount
Fully secured claims (FSC):
144,507 Mortgage note payable (deducted contra) 180,634
Unsecured claims with priority (ded. contra):
16,630 Wages payable 20,787
3,441 Taxes Payable 4,301
- Estimated Liability to Trustee 93,184 118,272
Partially secured claims (PSC:
60,211 Notes payable 75,264
Less: Realizable value of
Inventories (64,512) 10,752
Unsecured claims without priority:
54,477 Notes payable 68,096
172,032 Accounts Payable 215,040 283,136

Stockholders’ Equity
286,720 Capital Stock
(170,312) Retained Earnings (Deficit)

567,706 235,110

Problem 2 (a) ESTATE ACCOUNTING – Journal entries

BOOKS OF TRUSTEE BOOKS OF SB ENTERPRISES

Cash 25,600 Trustee Account 128,000
Accounts Receivable 51,200 Accounts Payable 320,000
Notes
Inventories 230,400 Payable 256,000
Land 128,000 Deferred Revenue 6,400
Buildings 640,000 Wages Payable 19,200
Intangible Assets 166,400 Mortgage Note Payable 512,000
Accounts Payable 320,000 Cash 25,600

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 Notes Payable 256,000 Accounts Receivable 51,200

Deferred Revenue 6,400 Inventories 230,400

Wages Payable 19,200 Land 128,000
Mortgage Note Payable 512,000 Building 640,000
Estate Equity 128,000 Intangible Assets 166,400

Cash 810,240 Retained Earnings 458.240

Estate
Equity 458,240 Trustee Account 458,240
Accounts Receivable 51,200
Inventories 230,400
Land 128,000
Bldgs 640,000
Intangible Assets 166,400
Payable to Trustee 52,480

Mortgage Note Payable 512,000 No Entry

Deferred Revenue 6,400
Wages Payable 19,200
Payable to Trustee 52,480
Cash 590,080

Accounts Payable 136,534 No Entry

Notes Payable 109,226
Cash 245,760

Capital
Accounts Payable 183,466 Stock 256,000
Notes Payable 146,774 Trustee Account 330,240
Estate Equity 300,240 Retained Earnings 586,240

(b) Statement of Realization and Liquidation (Conventional Method)

ASSETS
To be Realized: Realized:
Accounts Receivable 51,200 Accounts Receivable 46,080

Inventories 230,400 Inventories 124,160

Land 128,000 Land & Bldgs. 640,000
Buildings 640,000
Intangible Assets 166,400
Total 1,216,000 Total 810,240

Acquired: - Not Realized -

LIABILITIES
Liquidated: To be Liquidated:
Accounts Payable 136,534 Accounts Payable 320,000
Notes Payable 109,226 Notes Payable 256,000
Deferred Revenue 6,400 Deferred Revenue 6,400
Wages Payable 19,200 Wages Payable 19,200
Mortgage Note Payable 512,000 Mortgage Note Payable 512,000
Payable to Trustee 52,480
Total 835,840 Total 1,113,600

Not Liquidated: Assumed:

Accounts Payable 183,466 Payable to Trustee 52,480
Notes Payable 146,744
Total 330,240 Total 52,480

REVENUES & EXPENSES

supplementary
Charges Supplementary Credits
Liquidation Expenses 52,480 -
Total 52,480 - Total

Total Total
Debits 2,434,560 1,976,320 Credits
458,240 Net Loss
2,434,560 2,434,560
SUPPLEMENTARY SCHEDULES:
Cash CAPITAL STOCK RETAINED EARNINGS
32,000 737,600
1,012,800 307,200 320,000 128,000

458,240

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