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CHAPTER 2: CORPORATE LIQUIDATION

Part 1: Theory of Accounts

1. It refers to the extinguishment of the juridical personality of a corporation for

causes expressly provided by law.
a. Corporate liquidation
b. Corporate dissolution
c. Corporate rehabilitation
d. Corporate termination
2. It refers to the process of winding up the affairs of the corporation by settling its
corporate debts and distribution the remainder to the stockholders.
a. Corporate liquidation
b. Corporate dissolution
c. Corporate rehabilitation
d. Corporate termination
3. After the date of corporate dissolution, what is the maximum period allowed by
law to dissolve corporation to complete its liquidation process?
a. 1 year
b. 2 years
c. 3 years
d. 4 years
4. What is the term used when the total stockholders’ equity has debit balance?
a. Deficit
b. Deficiency
c. Delinquency
d. Default
5. Which of the following unsecured debts with priority shall be paid first during
corporate liquidation?
a. Corporate liabilities to employees
b. Obligations arising from corporate crime
c. Corporate liabilities arising from taxes to government
d. Obligations arising from corporate tort or quasi-delict
6. Which of the following creditors can always fully recover its claim from a
dissolved corporation during corporate liquidation?
a. Fully secured creditors
b. Partially secured creditors
c. Unsecured creditors with priority
d. Unsecured creditors without priority
7. Which of the following items is not being considered in the computation of
recovery percentage of unsecured creditors without priority?
a. Assets reserved for fully secured credits
b. Assets reserved for partially secured credits
c. Unsecured portion of partially secured liabilities
d. Assets not used as collateral for any liability
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Part II. Problem Solving

1. The following balances were ascertained in No Money Corp. which is

experiencing insolvency;
Cash 8,000 Accounts payable 80,000
Notes receivable 120,000 Accrued expenses 30,000
Inventories 80,000 Salaries payable 15,000
Prepaid expenses 10,000 Mortgage payable 155,000
Equipment, net 150,000 Ordinary shares 100,000
Deficit (12,000)
Additional information:
 Estimated net realizable value of the notes receivable was P 105,000 and
was pledged to the mortgage payable.
 80% of the book value of the inventories can be sold at P 45,000 and was
pledged to 60% of the accounts payable.
 The remaining book value of the inventories has an estimated fair value
of P 20,000.
 80% of the remaining unpaid accounts payable were secured by the
equipment having an estimated fair value of P 60,000.
 Prepaid expense has no estimated fair value.
 Liquidation and administration expenses were estimated in the amount
of P 8,000.
 Income tax payable had been accrued in the amount of P 2,000 (the
accountant recorded it using the accrued expense account).
 Interest on the notes receivable and mortgage payable has not been
accrued in the amount of P 10,000 and P 15,000 respectively.

1.1. How much is the estimated deficiency?

a. 61,400 b. 40,000 c. 55,000 d. 46,400

1.2. How much are the net free assets?

a. 52,400 b. 37,400 c. 31,000 d. 46,000

1.3. How much is the estimated payment to the mortgage payable?

a. 137,264 b. 146,191 c. 133,453 d. 142,379

1.4. How much is the estimated recovery percentage to the partially secured
accounts payable?
a. 97.29% b. 95.85% c. 96.28% d. 96.86%

2. Cagayan Co. is experiencing financial problems which resulted to ultimate

bankruptcy. The statement of financial position of the entity before liquidation
is presented below:
Cash 100,000 Income tax payable 200,000
Inventory 300,000 Salaries payable 300,000
Land 200,000 Note payable 800,000
Mortgage payable 100,000
Accounts payable 400,000
Contributed capital 500,000
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Deficit (1,700,000)
 The note payable is secured by the inventory with net realizable value of
P 250,000.
 The mortgage payable is secured by the land with fair value of P 120,000.

2.1. What is the amount received by the holder of the note payable at the end
of corporate liquidation?
a. 320,000 b. 300,000 c. 250,000 d. 260,000

2.2. What is the amount received by the holder of the mortgage payable at the
end of corporate liquidation?
a. 120,000 b. 200,000 c. 150,000 d. 100,000

2.3. What is the amount received by the employees at the end of corporate
liquidation concerning their salaries?
a. 100,000 b. 120,000 c. 72,000 d. 300,000

3. Liberty Corp. provided the following balances in July 1, 2018:

Cash 5,500 Accounts payable 59,500
Accounts receivable 35,000 Wages payable 25,000
Inventories 60,000 Tax payable 35,000
Notes receivable 78,000 Note payable 65,000
Equipment 256,000 Mortgage payable 175,000
Share capital 120,000
Deficit (45,000)
In the statement of realization and liquidation the following data are ascertained
for the month of July:
 The note payable and mortgage payable together with their respective
interest are paid.
 Only 7/8 is collected from the existing accounts receivable at the
beginning of the month.
 Half of the inventories were sold for P 45,000.
 Only P 68,500 of the notes receivable is collected.
 Equipment is sold for P 225,000.
 Administrative expenses of P 13,800 are paid.
 Additional credit sales amounting to P 10,500 are made for the remaining
inventories
 Interests not accrued for the month are note receivable P 1,500, note
payable P 5,500 and mortgage payable P 10,500.
 All existing noncash assets at the beginning of the month are sold or
collected during the month.

3.1. How much is the profit or loss in the statement of realization and
liquidation?
a. (42,475) b. 27,975 c. (77,675) d. 75,175

3.2. How much is the estate equity at July 31, 2018?

a. (102,975) b. 32,525 c. 150,175 d. (2,675)
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4. Finish Corp. has been undergoing liquidation since January 1. Its condensed
statement of realization and liquidation for the month of June is presented
below:
Interest received in cash on investment 10,500
Purchases on account 105,000
Liabilities liquidated 2,450,000
Assets realized 2,100,000
Payment of expenses of trustee 525,000
Liabilities to be liquidated 4,574,500
Sales on account 50,000
Assets to be realized 2,940,000
Liabilities not liquidated 2,229,500
Sales for cash 1,750,000
Assets not realized 6,650,000
What is the net gain (loss) on realization and liquidation?
a. 1,225,000 b. (479,500) c. (1,225,000) d. 479,500