Question

F Corporation has filed for Chapter 7 bankruptcy. A trustee is appointed to liquidate the company's assets and pay creditors in accordance with the provisions of the bankruptcy laws. F’s balance sheet, prepared using GAAP for continuing businesses, is as follows:

Assets
Cash	$       5,000
Accounts receivable	90,000
Inventories	200,000
Prepaid expenses	40,000
Building, net	400,000
Equipment, net	250,000
Intangible assets	300,000
Total assets	$1,285,000
Liabilities and shareholders' equity
Accounts payable (unsecured)	$   340,000
Accrued wages (priority)	80,000
Accrued taxes (priority)	90,000
Loan payable (unsecured)	400,000
Note payable (secured by building)	350,000
Capital stock	100,000
Retained earnings (deficit)	(75,000)
Total liabilities and shareholders' equity	$1,285,000

Additional information:

1.            It is estimated that $60,000 of the accounts receivable will be collected.

2.            The inventories will likely be sold at a price approximating 50% of book value.

3.            A refund of $10,000 is expected on the prepaid expenses.

4.            The building is appraised at $320,000, and the equipment is appraised at $275,000. The intangible assets have no realizable value.

                Required             

                a.            Prepare a statement of affairs for F Corporation

                b.            Compute the following:

i.              Estimated gains and losses on asset dispositions

ii.             Total cash expected to be distributed

iii.            Expected payments to partially secured, priority, and unsecured creditors. Round your answers to the nearest dollar. Note: The totals in requirements ii and iii should be the same.

               

Answer 1

Statement of Retained Earnings
Opening balance	$          -75,000
Add-: Bad debt on account of non-recovery from debtors	$          -30,000
($90,000 - $60,000) (Loss)
Add-: Loss on sale of inventory	$       -100,000
($200,000 X 50%)
Add-: Non-Realisable value from prepaid expenses	$          -30,000
($40,000 - $10,000) (Loss)
Add-: Non-Realisable value from Building	$          -80,000
($400,000 - $320,000) (Loss)
Less-: Realisable value from Equipment	$           25,000
($275,000 - $250,000) (Gain)
Add-: Non-realisable value from Intangible assets (Loss)	$       -300,000
	$       -590,000

Estimated loss on disposition = $590,000 - $75,000 = $ 515,000

F Corporation
STATEMENT OF AFFAIRS
Equity and Liabilities	Amount         $	Assets	Amount         $
Cash	$               5,000	Accounts payable (unsecured)	$         340,000
Accounts Receivable	$            60,000	Accrued wages (priority)	$            80,000
Inventories	$          100,000	Accrued taxes (priority)	$            90,000
Prepaid Expenses	$            10,000	Loan payable (unsecured)	$         400,000
Building	$          320,000	Note payable (secured by building)	$         350,000
Equipment	$          275,000	Capital stock	$         100,000
		Retained earnings (deficit)	$        -590,000
	$          770,000		$         770,000

Total Cash expected to be distributed = $770,000

Expected payment

Note payable $320,000 (to the extent of secured asset)

Accrued Wages and Accrued taxes = $80,000 + $90,000 = $170,000

Balance ($770,000 - $350,000 - $80,000 - $90,000) = $250,000 will be distributed among unsecured creditors

Particulars	Amount	Expected payment (*)
Accounts payable (unsecured)	$       340,000	$               110,389.61
Loan payable (unsecured)	$       400,000	$               129,870.13
Note payable (secured by building)	$         30,000	$                   9,740.26
Total	$       770,000

Balance $250,000 will be distributed as per the O/s balance.

Accounts payable (unsecured) =($340,000 X $250,000)/$770,000 = $110,389.61

Loan payable (unsecured) = ($400,000 X $250,000)/$770,000 = $129,870.13

Note payable (secured by building) = ($30,000 X $250,000)/$770,000 = $9,740.26