ABC Co. will be able to pay, on the basis of the above showing, 81.6 cents on the dollar of all unsecured claims.
| A B C Company Deficiency Account, December 31, 1918 | |||
| Estimated Shrinkages in Value: | Estimated Increments in Value: | ||
| Cash | $ 500.00 | Land | $ 15,000.00 |
| Accounts Receivable. | 110,000.00 | X Y Co. Stock | 5,000.00 |
| Claim against Accommodated Party | 15,000.00 | Capital Sunk: | |
| Capital Stock | 250,000.00 | ||
| Merchandise | 27,000.00 | Surplus | 25,000.00 |
| Machinery | 50,000.00 | Net Deficiency to be | |
| Buildings | 20,000.00 | borne by Creditors | |
| Good-Will | 125,000.00 | (see Statement of Affairs) | 52,500.00 |
| $347,500.00 | $347,500.00 | ||
Comments on Problem. From the above solution it will be noted that the order of showing the assets is not quite the same as would be ordinarily followed on a balance sheet. A separate group is made to indicate the securities pledged with creditors, shown under the two heads “Partly Secured,” and “Fully Secured.” It is to be further noted that the securities in the hands of partly secured creditors have no realizable value applicable to general unsecured creditors; hence, they are always shown deducted on the liability side of the statement from the claims of partly secured creditors, the difference giving the amount of such claims which must rank with other unsecured creditors. In the case of fully secured creditors, if the value of the security held is estimated to exceed the claims against it, this excess will be shown on the asset side of the statement as property to which the unsecured creditors may look for the satisfaction of their claims.
It should be noted that the amount of net worth is included in the Book Values column of the liabilities, chiefly for the purpose of showing a complete balance sheet. This makes possible an easy estimate of the deficiency figure, as shown on the face of the statement. The estimate is made by subtracting the figure of net worth from the total of the Shrinkages column. This is, of course, the same figure as shown in the Deficiency account and is arrived at in practically the same way. In the solution given, the two items indicated by asterisk in the Shrinkages column represent increments in value, and in arriving at the total of that column these are, of course, subtracted from the total shrinkages.
Inasmuch as the accommodation notes were not previously carried on the books of the bankrupt, they must here be inserted in the balance sheet columns both as an asset and a liability.
It is to be noted that the amount due the preferential creditors must be shown deducted from the total unpledged assets because the creditors have no claim against any specific asset although a first claim against all unpledged assets. After deducting the amount from the total unpledged assets, the figure of net free assets which can be applied to the claims of unsecured creditors is arrived at. A comparison of this figure of net free assets with the total amount due unsecured creditors gives the percentage which the creditors may expect on their claims. It is to be understood that the expenses of winding up the business will also be a charge against the net assets before the creditors can receive anything. It therefore usually happens that the estimate of this percentage is higher than is actually realized at the time of final settlement.
Realization and Liquidation Account
The realization and liquidation account is a statement which has played a somewhat prominent part in C. P. A. examinations. It is never used in practice and has no value other than to test the ability of the student to analyze and present in logical form facts and activities which are sometimes difficult to analyze and present in a condensed form and in such fashion as to show the relation of the various items. Presumptively, the purpose of the statement is to show the activities of the trustee after the appraisal of the bankrupt’s estate. In some instances the realization and liquidation statement takes the values of the assets as appraised by the trustee or other party making up the statement of affairs and shows the activities carried on through the realization of the assets and the liquidation of the liabilities. In other cases the realization and liquidation account is tied up with the values at which the assets are carried on the account books. There is no principle at issue as between the two methods. It seems perhaps more logical to look upon the two accounts, namely, the statement of affairs and the realization and liquidation account, as a unit statement covering the entire bankruptcy proceedings. Under that interpretation the “expected-to-realize” value as shown by the statement of affairs would form the basis for the realization and liquidation account, but, as stated above, either method is correct and no accounting or legal principle is involved.
Evolution of the Realization and Liquidation Account
The development of the realization and liquidation account through its various stages seems to have been based on three theories. When first used it was supposed to represent an account actually opened on the books of the bankrupt through which his assets and liabilities were shown transferred to the receiver or trustee.