STATEMENT OF AFFAIRS

WHEN AN INDIVIDUAL OR A BUSINESS IN UNABLE TO PAY ITS OBLIGATION WHEN IT BECOMES DUE ,  IT IS  CALLED INSOLVENCY.
THIS SITUATION IS SOMETIMES REFERRED TO AS  equity concept.

WHEN THE AGGREGATE BUSINESS PROPERTY OF A PERSON OR BUSINESS AT A FAIR VALUATION IS LESS THAN THE TOTAL LIABILITIES,  THIS is   bankruptcy concept of insolvency.

PROCEDURES IN INSOLVENCY

WHEN A BUSINESS BECOMES INSOLVENT THE FOLLOWING PROCEDURES:

1.  request the creditors for the extension of time to settle obligations.
2. request to creditor to reduce the liabilities.  the creditor may accept a certain percentage of their claims as full settlement .
3.  agree to form a creditors committee
4.   execute voluntary assignment of debtor property in trust.

if the above is not satisfactory to the parties , they may file a petition  to   a  court of equity.

ARRANGEMENT

   a debtor may file a petition for arrangement which is a plan  FOR THE SETTLEMENT , SATISFACTION OR EXTENSION OF TIME FOR PAYMENT  OF OBLIGATIONS TO UNSECURED CREDITORS.

REORGANIZATION
  a petition for  companys reorganization may be filed by the debtor or the creditors.
  that petition should include the declaration of insolvency and explanation why ARRANGEMENT IS NOT ACCEPTABLE.

THE ACCOUNTING FOR REORGANIZATION TALKS ABOUT VALUATION PROBLEMS ,THE RECOGNITION OF GAIN OR LOSS RESTRUCTURING .

THE DEBTS CAN BE RESTRUCTURED AS FF:
1.   the debtor may transfer assets  in full settlement of obligation.
2.  the debtor may give an equity interest in the firm to satisfy the liabilities.
3.  the creditor may agree to modify the terms of liability.

the journal entries involved :

1.  write downs of assets.\
2.  reduction of par or stated value of capital stock
3. extension of due date of notes payable
4. exchange of debts securities  to  equity securities .


ILLUSTRATIVE  EXAMPLE OF REORGANIZATION:

  JOY COMPANY filed a pettion for reorganization., it was approved.  the balance sheet is shown below.

   CASH                                21000
   ACCTS RECE.                 30000
   BAD DEBTS                     3,250   26750
INVENTORIES                                35500
FIXED ASSETS                170000
DEPN                                  68750  101250
LAND                                               20,000
TOTAL

ACCRUED EXP  WITH PRIORITY              6000
ACC, INTEREST PAYABLE                        12500
ACCTSPAYABLE  SECURED                     15000
ACTS. PAYABLE UNSECURED                  33500
NOTES PAY    UNSECURED                      50000
BONDS PAY                                              112500

EQUITY
COMMON STOCK  10 PAR                    125000
RETAINED EARNING                             (149500)

the plan provides the ff:

1.  creditors which are unsecured  agree to accept accounts receivble in full payment of their claims. the value of receivable is 25,000
2.  accrued exp with priority are paid in full
3. a creditor holding a 30,000 notes agrees to accept land in full settlment of the note plus accrued interest of 2000. the land has a market value of 23750.
4.  a creditor holding 14% ,20,000 note , on which 1000 interest has accrued agrees to extend maturity of the note for two years and reduce interest to 85
5. bondholder agree to accept equity of 3750 shares .  Market value of stocks 12.50 per share.

JOURNAL ENTRIES

1.      since the realizable value of Accounts receivable is only 25,000 Net, the present gross receivable is 30,000 or  5000 more than the its fair value,  but it has already a 3250  allowance bad debts, so it needs an additional bad debts of 1750.00 but since this is a reorganization there is no need to debit BAD DEBTS ACCOUNTS but a LOSS ACCOUNTS

                 ALLOW. BAD DEBTS              3250
                 loss on revaluation of receivable   1750
                          accts. receivable                                 5000
       to close balance of allowance bad debts, and credit receivable to make it 25,000.

                 accounts payable            33,500
                          accounts receivable                                      25,000
                          GAIN ON RESTRUCTURE OF DEBTS      8500

            To close accounts payable in exchange of accts receivable which receivable has a lower value than the payable , therefore A  BENEFIT OR GAIN  was created.  The creditor has  record in his book this accounts receivable and will collect from the client of the company


2.  accrued expense              6000
         cash                                       6000


3.   there is a notes payable  with principal of 30,000 with accrued interest of 2000.00 . the creditor is willing to exchange that with the land with a fair value of 23,750.   the 30,000 notes payable has to be debited to close it and the accrued interest also , and the 20,000 of the land to be credited , but since the book value of the land is only 20,000 and it was revalued to 23750, the land book value is 23750 , a gain on transfer of  assets was realized because the land value increases. .

         land                  3750
                gain on revaluation of asset        3750
       to revalue the land

         notes payable           30,000
         accd. interest              2000
                  land                                    23750
                gain on restructuring of  debt   8250
      to close  notes payble and its accrued interest,  and credit new value of land in exchange for the notes payable and record the gain due to restructuring  as a result of notes being bigger than the land so exhanged.

4.  there is no exchange of assets here but a restructuring of notes by extending the maturity for another two years.  what will be closed is the accounts notes payable the and accrued interest payable and the notes payable will be renamed as  RESTRUCTURED DEBT.

                NOTES PAY              20,000
                ACCD.INT                  1,000
                      RESTRUCTURED DEBT    21000

5.  THE BONDS PAYABLE WILL BE CONVERTED INTO CAPITAL STOCK, THAT MEANS THE CREDITOR WILL IN TURN BE  A STOCKHOLDER.  IN THIS CASE THE BONDS PYABLE WILL BE DEBITED AND CAPITAL STOCK WILL BE CREDITED AT PAR VALUE.  BUT SINCE THE MARKET VALUE OF THE STOCKS IS HIGHER THAN THE PAR VALUE , THAT EXCESS SHALL BE CREDITED AS CONTRIBUTED CAPITAL AND NOT GAIN.

  BONDS PAYABLE             112,500
         CAPITAL STOCK                      37500
         CONTRIBUTED CAP                  9375
           GAIN ON RESTRUCTURING  65625
=====================================================================


LIQUIDATION

IF THERE IS NO HOPE THAT REORGANIZATION  WILL WORK, THE REMAINING ALTERNATIVE IS LIQUIDATION APPLYING BANKRUPTCY PROCESS.
IF CREDITORS INITIATE IT IS CALLED INVOLUNTARY BANKRUPTCY, IF DEBTOR FILED IT IS VOLUNTARY BANKRUPTCY.


STATEMENT OF AFFAIRS

this is simply  just like a balance sheet format though with a lot of information appearing on it as ff:  THERE ARE TWO TYPES OF FORMAT.
ONE FORMAT  IS CALLED CONVENTIONAL FORMAT, THIS IS IT.

ON THIS SCHEDULE , THE ASSETS ARE ARRANGED AS FOLLOWS

 A.  ALL ASSETS WHERE  IT IS  FULLY PLEDGED(  that is the assets is bigger than the liabilities) TO A CORRESPONDING LIABILITIES ARE GROUP IN THE FIRST SET.

b.  the second group of assets are those which are partially pledged to a liabilities, that means the assets value is below or lesser than the liabilities being secured.
c. the third group of assets are those that are FREE that means it is not pledged in any liabilities, presumably because all liabilities are already either fully secured and partially secured  by other assets mentioned in A. B.

THE PRESENTATION OF THE AMOUNTS
  1.  THE BOOK VALUE OF THE ASSETS AND THE LIABILITIES AND THE STOCKHOLDERS EQUITY ARE WRITTEN
  2. ON EACH BALANCE SHEET ACCOUNTS , THE CORRESPONDING REALIZABLE VALUE OF THAT ASSETS ARE WRITTEN OPPOSITE THE BOOK VALUE.   IF ON THAT ASSETS ACCOUNTS IT IS  PLEDGED TO A CERTAIN LIABILITY ACCOUNT  , THAT LIABILITY AMOUNT SHALL BE DEDUCTED ON THAT REALIZABLE VALUE OF THAT ASSETS.
3.  THE FOURTH COLUMN SHOWS THE DIFFERENCE BETWEEN THE BOOK VALUE OF THE ASSETS AGAINST THE REALIZABLE VALUE OF IT,  AND POSTED EITHER LOSS OR GAIN ON REALIZATION.
4. THE FIFTH COLUMN  COMPOSED OF THE FOLLOWING:
          a.   on the group of assets ( FULLY SECURED )where it is sufficient to cover the liabilities mentioned in letter a above, any excess of the assets over the liabilities it has secured , that amount is written on the fifth column as  ESTIMATED AMOUNT  STILL AVAILABLE..
          b. on the groups of assets where it can only PARTIALLY SECURED a liabilities , no amount is written this fifth column.because nothing is available or excess amounts.
          c.  on the group of assets called FREE ASSETS, all of it shall be placed on this fifth column because all of it are all AVAILABLE since it is not pledged to any liabilities.
           A TOTAL OF THIS COLUMN IS EXTRACTED AND DEDUCT ON IT THE LIABILITIES CONSIDERED AS A PRIORITY , THAT MEANS THIS WAS NOT ASSIGNED TO SECURE  ANY ASSETS.. THE BALANCE IS TERMED AS NET AVAILABLE ASSETS.THEN ADD ON THIS THE DIFFERENCE BETWEEN THE NET AVAILABLE AMOUNT LESS THE  BALANCE OF THE PARTIALLY SECURED LIABILITIES AND THE UNSECURED LIABILITIES. THEN YOU NOW OBTAIN THE FINAL NET AVAILABLE AMOUNT OF ASSETS.

           THE LIABILITIES ARE ARRANGED AS FOLLOWS:

THE LIABILITIES ARE ARRANGED AS FF:
     THE FIRST GROUP ARE THOSE LIABILITIES  OR "  CREDITORS WITH PRIORITY,"  THESE ARE NOT REPRESENTED BY CREDITORS BUT RATHER A LEGAL OBLIGATIONS OF THE COMPANY TO PAY.   SAY  TAXES,,, WAGES PAYABLE., LITIGATION EXP.   ETC

    THE SECOND GROUP ARE THOSE LIABILITIES  OR" CREDITORS THAT ARE FULLY SECURED "BY THE ASSETS WHICH AMOUNT ARE  DEDUCTED ON THE CORRESPONDING ASSETS THAT SECURED IT.

THE THIRD GROUP IS THE LIABILITIES THAT ARE   "   PARTIALLY SECURED " BY THE ASSETS AND WHICH ARE ALSO  DEDUCTED ON THE ASSETS THAT SECURED IT.

THE FOURTH GROUP ARE THOSE LIABILITIES THAT ARE NOT SECURED OR "  UNSECURED CREDITORS "BY ANY ASSETS , OR A BALANCE OF A LIABILITIES THAT WERE NOT FULLY SECURED BY AN ASSET, SAY THE ASSETS VALUE IS ONLY 10,000 BUT THE NOTES PAYABLE IS 15,000, THE 5000 IS PLACE UNDER UNSECURED LIABILITIES.

ON THIS  RIGHT SIDE OF THE SCHEDULE , OF COURSE THE BOOK VALUE OF THE LIABILITIES ARE WRITTEN .
HOWEVER ON THE THIRD COLUMN , OPPOSITE THE BOOK VALUE, THE FOLLOWING AMOUNT MAY BE WRITTEN.

              1.  basically what ever is the book value of the liabilities is the one to be written on the third column , however if there are liabilities or expenses that are incurred but not yet recorded , say an expenses incurred by not yet reimbursed or paid by the company it shall be part of liabilities  WITH PRIORITY OR ON FULLY SECURED LIABILITIES OR ON PARTIALLY SECURED LIABILITIES OR ON UNSECURED CREDITORS OR LIABILITIES.
             2.   now if there is a certain liabilities that are partially secured by an asset , that means the asset amount is smaller than the liabilities, the amount of the assets that partially secured it must be deducted on the liabilities it has secured and the difference shall be written on the FOURTH COLUMN NAMED AS AMOUNT UNSECURED.
            3. ALL UNSECURED CREDITORS OR LIABILITIES , THE AMOUNT SHALL BE WRITTEN ON THE FOURTH COLUMN

NATURALLY , THE TOTAL OF THE ASSETS FALLING UNDER ESTIMATED AMOUNT AVAILABLE  MUST TALLY WITH THE FOURTH COLUMN OF THE LIABILITIES SIDE.


OTHER CLARIFICATIONS

A.  assets pledged to more than one creditor or liabilities .  where an assets is pledged to two say mortgage  but its realizable value is more than the claims of the two mortgage, both claims to be deducted on that assets and excess extended to amount available column.  example
                                                                                       AMT AVAILABLE
  ASSETS                                           20,000
  TOTAL TO MORTGAGE                12,000
        EXCESS                                                                   8000    
     when the asset is expected to bring amount where it can cover the first mortgage but not enough to cover the 2nd mortgage, still the assets is placed under assets pledged with fully secured creditors.  the excess of the assets over the first mortgage shall be brought down to the "  assets pledged with partially secured creditors" where the mortgage amount of the second mortgage is deducted .
as for the liabilities section, the first mortgage is shown under fully secured creditors, whle the second to the partially secured creditors, the unsecured extended to the unsecured column.

ASSETS                                                      20,000
FIRST MORTGAGE                                   15,000
   EXCESS                                                     5,000

THE SAME ASSET                                        5000
LESS 2ND MORTGAGE                              10,000
    SHORTAGE                                                 5,000

this  shortage of 5000 shall also be  presented on the the partially secured creditors on LIABILITY SIDE  as ff

     mortgage amount                                              10,000
     asset amount                                                       5000
           shortage                                                                       5000 unsecured column
                  

if the assets is expected to be sold less than the first mortgage , it is classified under assets pledged wiht partially secured creditors, with only the first mortgage claim shown as a deduction.  ON THE LIABILITIES SIDE, this mortgage amount is of course reflected and the asset amount is deducted and the balance is extended to the unsecured column. the second mortgage is also written and fully extended to the unsecured column.
    ASSETS                           1,000                              LIABILITIES SIDE
    FIRST MORTGAGE        2,000                     FIRST MORTGAGE               2000
            DIFFERENCE          1,000                     ASSETS                                  1000               1000
                                                                          SECOND MORTGAGE                                   1000

b.    single asset in different classification-  when an asset is partly pledged and partly unpledged, it requires a split of the lump sum book value as well as the expected realizable value.  whether the realizable value is given in total , it is proper to divide it on the basis of book value of the component parts.

c.  inventories of manufacturing concern.  if the raw materials inventory is not pledged , realizable amount of it is extended in full to the AVAILABLE AMOUNT.  IF the portion of the materials will be used to complete a work in process , only the expected realization from the portion to be sold would appear on the AMOUNT AVAILABLE.
  if the work in process is unpledged and to be sold  , the realizable value is extended in full the AMOUNT AVAILABLE.
 where additional expenditure will be incurred for the completion for the completion of the inventory , this cost are deductible to the realizable value  before extending the net figures to AMOUNT AVAILABLE.
d.    accrued interest on assets or liabilities.   = accrued interest should be added to the principal .
e.  subscription receivable    this is reported to the FREE ASSETS.
f.   prepaid expense.   if this prepaid represent items that can be sold like supplies , the realizable value is extended to the AVAILABLE COLUMN.  but rent , insurance, may expire before liquidation , no realizable value is reported.


======================================================================

APPLYING THIS THEORY, THIS ILLUSTRATIVE EXAMPLE:

ASSETS

CASH                                                                 5000
RECEIVABLE  LESS BAD DEBTS                 150,000
raw materials                                                       80,000
finished goods                                                     130,000
marketable securities                                             40,000
land                                                                      26,000
building net depn                                                  180,000
machinery net of depn                                           240,000
goodwill                                                                  40,000
prepaid expenses                                                       5,000
   total                                                                 901,000

LIAB. AN CAPITAL
ACCOUNTS PAYABLE                                160,000
NOTES PAYABLE                                         270,000
ACCRUED WAGES                                         30,000
MORTGAGE PAYABLE                                260,000
COMMON STOCK                                      220,000
RETAINED EARNINGS                                  39,000
    TOTAL                                                     901,000

ADDITIONAL DATA

1.  CASH INCLUDES  CASH ADVANCE FOR SPENT FOR TRAVELLING 1,000
2   accounts receivable of 90,000 have been pledged to for the notes payable of  50,000
3. the marketable securities is valued at  20,000 plus a 500 shares of PLDT STOCK. THE market value of the stock si 36.00 per share. the securities have accrued interest due of 400.00 . the securities are collateral for a 40,000 notes payable.
4. appraised value of raw materials is 60,000 and finished good is 100,000 . for an additional cost of  20,000 the  the raw materials would realize 140,000 finished goods.
5. the appraised value of  fixed assets is land  50,000, building 220,000, machinery 150,000, but pledged to the mortage payable
6.  prepaid expense is exhausted during liquidation period.
7. accounts payable inlcude  30,000  of witholding tax  and 12,000 to creditors  which are assured of full pay.  there are unrecorded SSS PAYABLE 1000.00
8.  WAGes payable are preferred claims
9. mortgage payable consist of 200,000 on land and buildings and a 60,000 chattel mortgage on machinery.  total unrecorded accrued interest on mortgage is 4,800
10. legas fees are 10,000
11.  probable judgment on legal case is 100,000
12   unpaid audit fee 10,000 and estimated 2000 for liquidation work

                               STATEMENT OF AFFAIRS.

PARTICULARS                           BOOK      REALIZABLE   LOSS          ESTIMATED
                                                VALUE           VALUE            GAIN           AMT AVAILABLE

ASSETS PLEDGED WITH FULLY SECURED CREDITORS:

Accts receivable                    80,000                 80,000  
less: notes payable                                             50,000                                    30,000
land                                      26,000                  50,000           24,000
building                               180,000                 220,000          40,000
machnery                            240,000                 150,000           90,000
 total                                                                 420,000
less mortgagepayable/interest                             264,800                                    155,200

 ASSETS PLEDGED TO PARTIALLY SECURED CREDITORS

Marketable securities          40,000                     38,000           2000
add accrued interest                                                400                                 
total                                                                     38,400
less notes payable                                                40,000


FREE ASSETS:
CASH                                5,000                          4,000           1000                4,000
ACCts receivable                70,000                        70,000

finished goods                  130,000                        100,000       30,000            100,000
raw mat                                              140,000
less cost to complete         80,000         20,000     120,000        40,000           120,000
goodwill                              40,000                            -               40,000    
prepaid expense                 5,000                                                 5 ,000

total                                                                                                                 409,200
Less: creditors with priority                                                                                83,000
_______________________________________________________________________
net amount of assets available                                                                           326.200
add deficiency to unsecured creditors(326,200 less 421600                               95,400
_______________________________________________________________________

GRAND TOTAL                                                                                            421,600      
+++++++=======================================================

LIABILITIES SIDE

CREDITORS WITH PRIORITY
                                                                                               UNSECURED AMOUNT
Witholding tax                  30,000                         30,000                           
social security payable                                            1000
wages payable                  30,000                         30,000
liquidation exp                                                       10,000
promised liabilities                                                  12,000
--------------------------------------------------------------  total                                                                      83,000

 CREDITORS FULLY SECURED/

NOTES PAYABLE        60,000                          60,000
MORTGAGE PAY      260,000                        260,000
INTEREST                                                          4,800
 TOTAL                                                           264,800

CREDITORS PARTIALLY SECURED
NOTES PAYABLE        40,000                      40,000
LESS MARKETABLE SECURITIES            38,400                          1,600
                                                                      ________

UNSECURED CREDITORS
ACCTS PAYABLE       130,000                                                       130,000
NOTE PAYABLE          170,000                                                       170,000
ACCTS RECE. CREDIT BALANCE                                                 10,000
 UNRECORDED AUDIT FEE                                                            10,000
EST. LIABILITY -SUIT                                                                    100,000

+=======================================================

TOTAL...........................................................................................    421,600
========================================================

EXPLANATIONS