Chapter 7 Liquidation, Statements of Affairs [AICPA Adapted]
Tower Inc. advise you that it facing bankruptcy proceeding. As the company's CPA, you are aware of its conditions. Tower's balance sheet on December 31, 20X1, and supplementary data follow:
Additional Information
1. Cash includes a $500 travel advance that has been expended.
2. Accounts receivable of $40,000, have been pledged in support of bank loans of $30,000. Credit balances of $5,000 are netted in the accounts receivable total.
3. Marketable securities consist of government bonds costing $10,000 and 500 shares of Dawson Company stock. The market
4. Appraised value of raw materials and finished goods is $30,000 and $50,000, respectively. For an additional cost of $10,000, the raw materials could realize $70,000 as finished goods.
5. The appraised value of fixed assets is $25,000 for land, $110,000 for buildings, and $75,000 for machinery.
6. Prepaid expenses will be exhausted during the liquidation period.
7. Accounts payable include $15,000 of withheld payroll taxes and $6,000 owed to creditors who have been reassured by the president of Tower that they will be paid. There are unrecorded employer's payroll taxes in the amount of $500.
8. Wages payable are not subject to any limitations under bankruptcy laws.
9. Mortgages payable consist of $100,000 on land and buildings and $30,000 for a chattel mortgage on machinery. Total unrecorded accrued interest for these mortgages amounts to $2,400.
10. Estimated legal fees and expenses in connection with the liquidation are $10,000.
11. The probable judgment on a pending damage suit is $50,000.
12. You have not rendered an invoice for $5,000 for last year's audit, and you estimate a $1,000 fee for liquidation work.
Required
a. Prepare a statement of affairs. (The Book Value column should reflect adjustments that properly should have been made as of December 31, 20X1, in the normal course of business.)
b. Compute the estimated settlement per dollar of unsecured liabilities.
(a)
Introduction: Statement of affairs is a statement of assets and liabilities. It is a critically important document in the insolvency process that provides an overview of the company’s entire assets and liabilities or obligation. It is prepared by a company’s liquidator.
The statement of affairs as on December 31, 20X1
Answer to Problem 20.8P
Statement of affairs
Book value (in $) | S.no. | Particulars | Estimated current values | Estimated amount available to unsecured claims | Estimated gain (loss) on realization |
Assets | |||||
1 | Assets pledged with fully secured creditors | ||||
40,000 | Accounts receivable | 40,000 | |||
13,000 | Land | 25,000 | 12,000 | ||
90,000 | Building (net) | 110,000 | 20,000 | ||
140,000 | Machinery (net) | 75,000 | (65,000) | ||
250,000 | |||||
Less: fully secured claims from liability | |||||
Note payable bank | (30,000) | ||||
Mortgage payable and interest | (132,400) | ||||
(162,400) | |||||
2 | Assets pledged with partially secured creditors: | ||||
20,200 | Marketable securities | 19,000 | |||
Accrued interest | 200 | ||||
19,200 | (1,000) | ||||
Less: notes payable | 20,000 | ||||
3 | Free assets | ||||
1,500 | Cash | 1,500 | 1,500 | ||
35,000 | Accounts receivable | 35,000 | 35,000 | ||
60,000 | Finished goods | 50,000 | 50,000 | (10,000) | |
40,000 | Raw materials | 60,000 | 60,000 | (20,000) | |
5,000 | Prepaid expenses | 0 | 5,000 | ||
Estimated amount for unsecured creditors (priority) | 234,100 | ||||
Less: liabilities with priority | (41,500) | ||||
Estimated amount available for unsecured creditors | 192,600 | ||||
Add: estimated deficiency to unsecured creditors | 18,200 | ||||
444,700 | (29,000) | ||||
Total unsecured debt | 210,800 | ||||
Liabilities | |||||
1 | Fully secured creditors: | ||||
30,000 | Notes payable to bank | 30,000 | |||
132,400 | Mortgage payable and interest | 132,400 | |||
Total (deducted on asset side) | 162,400 | ||||
2 | Partially secured creditors: | ||||
20,000 | Notes payable- bank | 20,000 | |||
Less: pledged marketable securities and interest | (19,200) | 800 | |||
3 | Liabilities with priority: | ||||
Estimated liquidation expenses | 11,000 | ||||
15,000 | Wages payable | 15,000 | |||
15,500 | Payroll taxes payable | 15,500 | |||
Total (deducted on asset side) | 41,500 | ||||
4 | unsecured creditors: | ||||
70,000 | Accounts payable | 70,000 | |||
85,000 | Notes payable | 85,000 | |||
5,000 | Audit fee of prior year | 5,000 | |||
50,000 | Contingent liability in damage suit | 50,000 | |||
21,800 | 5 | Stakeholders equity | |||
444,700 | |||||
Total unsecured debt | 210,800 |
Explanation of Solution
The creditors with priority is determined in the equity section.
The estimated amount available to unsecured creditors is determined by adding the free assets, interest on notes payable and interest on mortgage.
The credit balance of accounts payable should be recorded under free asset section and should be recorded after excluding the payroll taxes paid and credit balance of accounts receivable. The accounts payable, therefore, shall amount to $15,000
(b)
Introduction: Statement of affairs is a statement of assets and liabilities. It is a critically important document in the insolvency process that provides an overview of the company’s entire assets and liabilities or obligation. It is prepared by a company’s liquidator.
The estimated settlement to unsecured liabilities.
Answer to Problem 20.8P
The estimated settlement to unsecured liabilities is $0.914
Explanation of Solution
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