Chapter 20, Problem 20.8P

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 value of the bonds is $10,000, and the stock is $18 per share. The bands have $200 of accrued interest due. The securities are collateral for a $20,000 bank loan.

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.

To determine

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

To determine

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

  $\begin{array}{l}estimatedsettlementtoun\sec uredliabilities=\left(\frac{estimatedamountavailabletoun\sec uredcreditors}{Totalun\sec ureddebt}\right)\\ =\frac{192,600}{210.800}\\ =\$0.914\end{array}$