1. Assets pledged with fully secured creditors.

These are assets

whose estimated realizable value is equal or greater than the
liabilities secured by them. The excess of the realizable value
over the amount of liability secured becomes part of the free
assets available to unsecured creditors.
2. Assets pledged with partially secured creditors. These are
assets whose estimated realizable value is less than the
liabilities secured by them. The unsecured portion of the liability
will become part of the unsecured liabilities without priority and
the claimants will participate in the proceedings.
3. Free assets. These are the assets not held as collateral or
security to liabilities and are available for unsecured creditors. -
Not pledged / unsecured assets

The liabilities or claims are to be classified as:

NATURE OF CORPORATE LIQUIDATION 1. Unsecured liabilities with priority. Although not secured, these
Corporate liquidation refers to the process of converting non-cash assets liabilities are preferred before any payment to the general
of a liquidating corporation into cash and distributing the net proceeds unsecured creditors is made. The following are liabilities with
to its creditors first and then the remainder to stockholders. This shall be priority (in the proper order):
completed within three (3) years from the dissolution of a corporation. ✓ Unpaid salaries and wages of employees
✓ Estate administrative expenses of the trustee
FINANCIAL REPORTS ✓ Unpaid taxes
Liquidating entities usually prepare the following financial reports: 2. Fully secured liabilities. These are creditors’ claims whose
1. Statement of affairs amount is less than or equal to the realizable value of assets that
2. Statement of deficiency secure them.
3. Statement of realization and liquidation 3. Partially secured liabilities. These are creditors’ claims whose
amount is greater than the realizable value of assets that secure
Statement of Affairs them. In other words, these are the liabilities secured by assets
• The initial report prepared at the start of the liquidation process. with realizable value insufficient to cover the claims. The
• This contains an inventory of assets and liabilities of the liquidating unsecured portion of the liability will become part of the
corporation at the beginning of the liquidation process. unsecured liabilities without priority and the claimants will
• It is used to approximate the estimated amounts available to each participate in the proceedings.
class of claims. 4. Unsecured liabilities without priority. These are creditors’
claims that are not secured by any asset nor with priority.
➢ Assets are reported at their estimated realizable values while liabilities
are reported at their settlement values.
Estimated deficiency to unsecured non-priority creditors. This is
computed as net free assets less total unsecured liabilities without
Assets are classified as follows:
 Problem 1:
LET GO Corp. has filed for voluntary insolvency and is about to liquidate its business. LET GO
Corp.’s statement of financial position immediately prior to the liquidation process is shown
below:
priority. LET GO Corp.
➢ Alternatively, it can be computed as total estimated realizable Statement of Financial Position
value of assets less total claims. As of December 31, 2021

ASSETS
Current assets:
Cash P40,000
Accounts receivable 220,000
Note receivable 100,000
Inventory 530,000
Prepaid assets 5,000
895,000

Noncurrent assets:
Land 500,000
Building, net 2,000,000
Equipment, net 300,000
Goodwill 5,000
2,805,000
Statement of Deficiency TOTAL ASSETS 3,700,000
• This is prepared to accompany the statement of affairs.
LIABILITIES AND EQUITY
• This summarizes the sources of deficiency such as: Current liabilities:
✓ Net loss on realization (or asset disposition) [this should already be net Accrued expenses 221,000
of gains on realization] Income tax payable 350,000
✓ Additional liabilities and liquidation expenses Accounts payable 1,000,000
✓ Losses to be borne by owners (this is equivalent to the total 1,571,000
shareholders’ equity)
Noncurrent liabilities
Note payable (secured by equipment) 300,000
Problem 1: Loan payable (secured by land and building) 2,000,000
LET GO Corp. has filed for voluntary insolvency and is about to liquidate its 2,300,000
business. LET GO Corp.’s statement of financial position immediately prior
to the liquidation process is shown below: Capital deficiency:
Share capital 500,000
[See Statement of Financial Position →) Retained earnings (deficit) (671,000)
(171,000)
TOTAL LIABILITIES AND EQUITY 3,700,000
Additional information: priority? 100% but not always
The following information was determined before the commencement of 9. How much is the estimated amount to be received by partially secured
the liquidation process: creditors? 270,000
a. Only 76% of the accounts receivable is collectible. 10. What is the estimated recovery percentage of partially secured
b. The note receivable is fully collectible. An accrued interest creditors? 90%
receivable of P10,000 was not yet recorded. 11. How much is the estimated amount to be received by unsecured
c. The inventory has an estimated net selling price of P410,000. creditors without priority? 837,200
d. The prepaid assets are nonrefundable. 12. How much is the estimated amount of cash to be paid to all the
e. The land and building are expected to be sold at a total amount creditors of LET GO Corp.? 3,527,200
of P2,600,000. 13. How much is the estimated amount of cash to be received by the
f. The equipment is expected to be sold at a net selling price of corporate owners of LET GO Corp.? 0
P200,000. -statement of deficiency-
g. Administrative expenses expected to be incurred during the 14. How much is the estimated gross gain on asset disposition? 110,000
liquidation process is P30,000. This amount is not yet reflected 15. How much is the estimated gross loss on asset disposition? (282,800)
on the statement of financial position. 16. How much is the estimated net gain (loss) on asset disposition?
h. Accrued expenses include accrued salaries of P25,000. (172,800)
i. Accrued interest on the loan payable amounting to P15,000 was 17. How much is the estimated gain (loss) on liquidation? (217,800)
not reflected in the statement of financial position. 18. How much is the estimated amount of loss to be absorbed by
j. All of the other liabilities are stated at their expected settlement unsecured creditors? (388,800)
amounts. STEP 1 – Restate
STEP 2 – Determine Classification
REQUIRED:
-statement of affairs-
1. How much is the total free assets? 1,312,000
2. How much is the net free assets? 907,200
3. How much is the estimated deficiency to unsecured creditors without
priority? (388,800)
4. What is the estimated recovery percentage of unsecured creditors
without priority? 70%
5. How much is the estimated amount to be received by fully secured
creditors? 2,015,000
6. What is the estimated recovery percentage of fully secured creditors?
100%
7. How much is the estimated amount to be received by unsecured
creditors with priority? 405,000
8. What is the estimated recovery percentage of unsecured creditors with
STEP 3 – Drafting of Statement of Affair
Statement of Realization and Liquidation
• A financial report that reports the progress of the actual
liquidation process.
• It also contains information on the accomplishments of the
trustee.

Statement of Realization and Liquidation

Assets to be realized XX XX Assets realized
Assets acquired XX XX Assets not realized
Liabilities liquidated XX XX Liabilities to be liquidated
Liabilities not liquidated XX XX Liabilities assumed/incurred
Supplementary debits XX XX Supplementary credits
TOTAL XX XX

Components:
1. Assets to be realized – Represents the total book value of all non-cash
assets available for disposal as of the beginning of the period.
2. Assets acquired – Represents previously unrecorded assets that were
recognized during the period. Also known as additional assets or new
assets.
3. Assets realized – Represents the total book value or net proceeds
received from the sale or disposal of non-cash assets during the
 period. Problem 2:
4. Assets not realized – Represents the total book value of all non-cash The FAREWELL Company had a bad financial condition caused by heavy
assets at the end of the period. debts and insufficiency of liquid assets. On June 30, 2020, the following
5. Liabilities to be liquidated – Represents the total book value of all information was available:
liabilities to be settled as of the beginning of the period.
Cash P84,000
6. Liabilities incurred/assumed – Represents previously unrecorded
Assets not yet realized:
liabilities that were recognized during the period. Also known as Accounts receivable P60,000
additional liabilities or new liabilities. Inventory 120,000
7. Liabilities liquidated – Represents the total amount paid on all Trading securities 19,800
liabilities settled during the period. Land 73,500
8. Liabilities not liquidated – Represents the total book value of all Building 45,000
liabilities at the end of the period. Equipment 36,000
9. Supplementary charges or debits – Represents items of expenses Liabilities not yet settled:
incurred during the period. Accounts payable P208,500
10. Supplementary credits – Represents items of income realized during Notes payable 175,500
the period. Salaries payable 30,000
Taxes payable 13,500
To determine the net gain or loss on realization and liquidation, compare Bank loan 141,000
the sum of the two sides of the T-account: Estate deficit (P130,200)
➢ If total debits exceed the total credits, there is net loss on
realization and liquidation. During the six-month period ending December 31, 2020, the following
➢ If total credits exceed the total debits, there is net gain on transactions occurred:
realization and liquidation. a) The trustee sold the trading securities for P18,000.
b) Half of the inventories were sold for P48,000 while the other half
were sold on account for P63,000.
c) Paid off P41,000 of the bank loan and all liabilities with priorities
as well as P8,000 for estate administrative expenses.

During the six-month period ending June 30, 2021, the following
transactions occurred:
a) The trustee collected P70,000 of the accounts receivable.
b) Sold land for P88,000.
c) Sold equipment for P30,000.
d) Paid the balance of bank loan and half of the notes payable.
e) Administrative fee of P7,000 was paid.

1. How much is the net gain (loss) on realization and

 liquidation as of December 31, 2020? (18,800) Problem 3:
2. How much is the estate deficit as of December 31, 2020? The following data were taken from the statement of realization and
(149,000) liquidation of TIMES UP Corp. for the quarter ended February 28, 2020:
3. How much is the ending balance of cash on December 31,
2020? 57,500 Assets to be realized P103,125
4. How much is the net gain (loss) on realization and Assets acquired 112,500
liquidation as of June 30, 2021? 1,500 Assets realized 131,250
5. How much is the estate deficit as of June 30, 2021? Assets not realized 46,875
(147,500) Liabilities to be liquidated 168,750
6. How much is the ending balance of cash on June 30, 2021? Liabilities assumed 56,250
50,750 Liabilities liquidated 112,500
Liabilities not liquidated 140,625
Supplementary charges 146,250
Supplementary credits 159,375

1. How much is the gain (loss) on realization and liquidation for the
period? 52,500
2. If the ending balances of capital stock and retained earnings are
P93,750 and P37,500, respectively, how much is the ending
balance of cash? 225,000
3. If the beginning balances of capital stock and retained earnings
are P93,750 and P37,500, respectively, How much is the ending
balance of cash? 172,500