Appointment of Assignee or Receiver

A condition of bankruptcy does not necessarily exist in order to secure the appointment of an officer of the court or a representative of a business for the purpose of taking possession and disposing of the property and applying the proceeds to the liquidation of some or all of the debts. The titles given to the various capacities of the representative of the business or the court are assignee, receiver, and trustee. An assignee is a party to whom the owner of a business makes a general assignment of his business, usually for the benefit of his creditors. The owner is usually bankrupt or verging on bankruptcy at such a time. The assignee becomes a representative of the owner, appointed by him, and to that extent the owner is able to regulate the distribution of his estate. As a usual thing the creditors must consent to the appointment of the assignee if the estate is to be liquidated and distributed under his control. If such consent is not given or if the appointment of the assignee and his conduct of the liquidation prove unsatisfactory, it is possible for certain creditors to bring bankruptcy proceedings against the owner and secure the settlement of the estate under bankruptcy procedure. It is usually held, however, that no creditor who has given active approval of the liquidation under assignment can become a party to an application in bankruptcy. The procedure of the assignee in winding up the affairs of the owner does not differ in any essential respect, so far as the accounting is concerned, from that of the receiver or trustee. The accounting features, therefore, will be treated under the later heads of “Receiver” and “Trustee.”

If everything is satisfactory to both parties, a complete settlement of the estate will be effected by the assignee and the affairs of the owner will thus be wound up. In case of dissatisfaction, or in the absence of a general assignment in favor of creditors, proceedings in bankruptcy may be brought against the owner. As was pointed out in Chapter XXVIII, a receiver as an agent of the court may act in two capacities, he may be either a receiver in bankruptcy or a receiver in equity.

The receiver in bankruptcy takes possession of all the property of the bankrupt with the expectation of its ultimate disposal and the application of the amounts realized therefrom to the liquidation of the debts of the bankrupt. The receiver in equity, however, usually comes into possession of only a part of the property, which he is to use in whatever way seems best for the liquidation of the more pressing current claims of creditors. In this latter case a condition of insolvency cannot be said to exist because usually the assets exceed the liabilities. Simply because the management has allowed the current assets to become tied up in a more or less unrealizable form which is inapplicable to payment of liabilities, the business finds itself in difficulty. It becomes necessary temporarily to turn the property over to a representative of the owner and his creditors in order to satisfy their claims and at the same time to preserve the property from needless dissipation until such time as a satisfactory settlement with creditors can be made and the business placed on a sound footing once again. In case, however, a condition of insolvency exists, i.e., a condition in which the liabilities exceed the assets, a receiver in bankruptcy may be appointed by the court upon application of the creditors or at the request of the owner.

Appointment of Trustee

If the owner makes a voluntary application for settlement in bankruptcy there is usually no need to appoint a receiver. The creditors may come together almost immediately and elect a trustee who takes charge of the property and applies it to settlement with the creditors. If the bankruptcy is involuntary, it is frequently necessary for the court to appoint a receiver to whom the property of the proposed bankrupt is turned over for safe-keeping until the exact status of the owner can be determined and a trustee appointed. The primary duty of the receiver and the purpose of his appointment is to prevent the dissipation of the owner’s property and to maintain its integrity, thus insuring its full application to the claims of creditors. Hence, whether the procedure is one in voluntary or in involuntary bankruptcy, the receiver may be appointed if the court deems that the conditions so warrant. A receiver will almost always be appointed in case any of the properties of the proposed bankrupt are of a perishable nature and must be disposed of immediately to secure any return from them. In the absence of a receiver, sometimes the marshal in bankruptcy is called upon to take possession of the property and preserve it.

The receiver holds the property until the first meeting of the creditors which must be called by the court within 30 days after the owner has been adjudged a bankrupt by the court. Creditors are entitled to 10 days’ notice of the meeting in order to make their plans to attend. The chief business of this first meeting of creditors is the appointment of a trustee who takes over the property from the receiver in case one has been appointed, or from the bankrupt in the absence of the intermediary receiver. It is the duty of the trustee to take charge of the entire property, to turn it into cash as quickly and advantageously as possible, and to apply the proceeds to the liquidation of all claims against it.

It is purposed now to discuss some of the accounting phases of the receiver’s and trustee’s activities and to present also some more or less academic theories with regard to such accounting.

Accounts and Reports of a Receiver in Equity

When a receiver in equity is appointed by the court, he is entrusted with property for a specific purpose and must render a full accounting of his stewardship. It becomes necessary, therefore, for him to keep full record of all his activities. In simple situations where his activities are not complex, the keeping of a record of cash receipts and disbursements is sometimes deemed all that is required. Usually, however, it is much better for the receiver to keep a complete set of books showing the detail of his operation of the business, thus enabling him to furnish any desired information. The receiver generally acts under the somewhat specific orders of the court and must be careful to follow out those instructions in all matters. The opening up of the accounts of the receiver will depend somewhat on the court’s order specifying the property to be taken over.

It frequently happens that only a portion of the property passes into the possession and control of the receiver. As a usual thing he does not take onto his records the liabilities of the corporation incurred prior to his appointment, although he may be ordered by the court to pay those liabilities or some portion of them. His books will show, however, the liabilities incurred by him in his conduct of the business. Sometimes this requires a nice distinction and care must be exercised in making it—as in the case of goods ordered prior to the appointment of the receiver but not received until after his appointment. At the time the receiver takes over the properties, an account is opened with him on the books of the corporation, in which he is charged with all properties turned over to him and credited with all valuation reserves applicable to those properties. But, as stated above, no credit for liabilities is entered. The offsetting entries to the receiver’s account are credits and debits respectively to the accounts of the assets taken over and the valuation reserve accounts. On the books of the receiver these entries are reversed, i.e., the various asset accounts will be charged and their valuation reserves credited and a credit will be made to the corporation in receivership for the net values taken over. In case he is required by the order of the court to pay any of the prior liabilities of the corporation, the entry for such becomes a debit to an account called Debts Paid for the Corporation, or other similar title, and a credit to his cash.

In keeping account of the regular operations of the receiver, nothing new in principle is met. The receiver must at all times be careful to keep distinct all payments on his own account from those for the corporation. Similarly, he must keep separate the expenses which are incurred by him and those which belong to the corporation but which he pays. It is held, for instance, that the interest charges on the corporation’s obligations are not an operating expense of the receiver although he may be ordered by the court to pay them. Some of his duties will more than likely be to realize partly or fully on some of the assets turned over to him, in addition to the regular trading assets with which he conducts most of the business. These are accounted for on his books just as they would be on the books of the corporation. In a similar way any liabilities liquidated, record of which appears on his books, will be shown canceled in the usual way. As mentioned above, care must be exercised to keep his liabilities separate from those of the corporation. In the payment of liabilities the question of priority often arises. He must be careful in passing on their priority and he may have to secure the instructions of the court before settling the matter. This will be true particularly with regard to receiver’s certificates, the court usually determining at the time of their issue their relative priority as compared with the other liabilities. On the books of the receiver certain expenses will appear which are peculiar to the receivership. These include such items as lawyers’ and accountants’ fees, bonding company costs, etc., and are, of course, to be treated as his expenses. He should close his books periodically, and so far as possible the period of closing should correspond with the regular fiscal period of the corporation for the sake of preserving the continuity of the records for purposes of comparison.

Reports to the Court

The receiver must make periodic reports to the court—the first report to be made shortly after the assumption of his duties. In it he presents schedules or inventories of the properties taken over. If some of these are mortgaged or have other liens on them, the facts should be indicated. At the same time schedules of the corporation’s creditors should be drawn up, grouped under the heads of preferential, secured, unsecured, and contingent. In the preferential group appear those claims against the corporation which are given preference by law, such as taxes due the state, wages due workmen, mechanics’ liens, etc. In the secured group appear the claims of creditors who hold property as partial or full security for their claims. In the unsecured group appear all claims not secured; while in the contingent group appear the usual items of contingent liability such as were discussed in Chapter XIX.

Subsequent reports will be made to the court at its will or at least once yearly. No standardized form is followed in the submission of these reports, the attorney’s wishes usually governing. The report is designed for the purpose of apprising the court of the progress of the receiver’s administration and should cover such items as the assets realized during the period since the last report, the liabilities liquidated, and the results of the operation of the properties held by the receiver. A convenient form for the showing of this report is that known as the “charge and discharge” form. Under it the receiver is shown charged with certain items of property and income received, and discharged with liabilities paid and other similar items. Whatever variations from this form are needed to meet particular conditions, these should be incorporated. The report may follow somewhat the order of the items shown below.

This report may well be supported by a comparative balance sheet showing the condition at the time of the previous report and now. A profit and loss account to show the operations of the receiver is also helpful. A summary of all cash transactions may be included.

In a final report to the court a summary should be presented of all the operations since the beginning of the receiver’s control. This will, of course, show whatever property is turned back to the corporation. Upon the close of the receivership the receiver’s books may be closed up by crediting the accounts of the various assets which are turned back to the corporation, charging the corporation’s account which was originally set up at the time the property was taken over by the receiver and through which adjustments of the values of the assets have been made at the time of sale or otherwise. An important thing to keep in mind in connection with all accounts and reports of the receiver is the necessity for making full and adequate explanations of all entries, giving the authority for them and their source.

Accounts and Reports in
Bankruptcy Proceedings

Initial Statements Presented to the Court

In the case of a voluntary bankrupt, as was stated in Chapter XXVIII, at the time of the petition to the court a schedule must be presented of all the property owned by the bankrupt and a list of his creditors giving the address, if known, the amount of the claim, the consideration, and the security held, if any. If the bankrupt makes any claim for exemption of any properties, that claim should be presented at this time. These schedules must follow the forms prescribed by the court. In the case of an involuntary bankrupt, these various schedules will, of course, not be available at the time the petition is made, inasmuch as the condition of the proposed bankrupt is undetermined; the amounts of his assets and of his liabilities are unknown. It becomes necessary, therefore, to examine him in the presence of the court for the purpose of securing a statement of all property owned and of all claims against it. This information, as elicited by court examination, becomes the basis for the receiver’s and trustee’s records. If a receiver is appointed by the court and remains in possession of the property for any length of time, it will be necessary for him to present periodic reports to show the condition of the property at various times and a statement of his operations. The reports which he will make will be similar to those which a trustee would make had he been appointed immediately; therefore, the matter of reports and accounts for both the receiver and the trustee can be treated together.

Reports and Accounts of Receiver or Trustee

The law provides that the trustee must keep regular accounts showing all amounts received and the sources from which received, and all amounts expended and on what account such expenditures were made. This would seem to imply merely the keeping of a record of the cash received and expended. The trustee, however, is looked upon both as the representative of the bankrupt, as custodian of his property, and as the representative of the creditors for the purpose of liquidating their claims. Immediately upon assuming office he must make, or cause to be made, a complete inventory of all property coming into his possession. In valuing this inventory all real and personal property belonging to the bankrupt’s estate must be appraised by three disinterested appraisers appointed by the court. The trustee must make a written report to the court of the condition of the estate, as to the amount of money on hand and any other details demanded by the court, within the first month after his appointment, and bimonthly thereafter unless otherwise ordered by the court. His final report must be made 15 days before the final meeting of the creditors is called by the court.

In disposing of the property of the bankrupt, provision is made that without court order the trustee cannot sell any of the property for less than 75% of the value at which it was appraised by the court’s appraisers. The right of set-off is allowed, i.e., if the bankrupt has a claim against any of his creditors, the amount of the claim is canceled dollar for dollar against the creditor’s claim and only the balance of the claim is to be prorated on the same basis as the other creditors.

The trustee must keep a careful record of all properties disposed of by him and of all liabilities liquidated. What constitutes a careful record will depend largely on the circumstances in each case. Sometimes merely a record of cash received and disbursed will fulfill all requirements. In other cases it may be necessary to keep a full set of books in order properly to secure the information needed in the accounting to the court and the creditors. All reports made should be narrative in form rather than consisting only of formal schedules and accounts. A straightforward statement of all the activities of the trustee, supported by schedules in order to show summarized results, is the desideratum.

Liquidating Dividends

Whenever the cash in the hands of the trustee is sufficient to pay the claims of preference creditors and a 5% dividend to the unsecured creditors, a dividend must be declared. The declaration of the dividend is placed in the hands of the referee in bankruptcy who is a direct representative of the court in most bankruptcy matters. The trustee must pay the dividend within 10 days after its declaration by the referee who prepares and delivers to the trustee dividend sheets showing the dividend declared and the parties to whom payable. All dividend checks drawn by the trustee must be countersigned by the referee.

Relative Standing of the Creditors

In connection with the creditors of a receiver in equity a statement was made above of the various classes of creditors whose claims are to be satisfied. These consist of preference creditors, secured creditors, and unsecured creditors. The trustee in making his liquidating dividends will pay first those creditors who are given preference by law. Within the preference class the order of priority of claims is as follows:

Creditors who are fully secured rest their claims against the security held by them and not against the trustee. Any surplus realized on the property held must be turned over to the trustee for the benefit of unsecured creditors. The general rule in the case of a lien is that the remedy against the property must be exhausted first before any creditor may share with the unsecured creditors. When all the property has been realized upon and all the cash which has come into the hands of the trustee has been disbursed in satisfaction of the claims of the various creditors, the trustee’s duties are at an end and his records may be closed up.

Statement of Affairs

While having no legal status in this country, the statement of affairs, as it is called, is used to serve certain purposes in connection with matters in insolvency proceedings. Under the English bankruptcy laws such a statement is required of every insolvent debtor. Its complementary schedule, known as the deficiency account, is also required. In this country the chief significance of these two forms of statement is found in the examinations set by the various state boards of certified public accountants. They may, however, serve some additional purposes, chief of which are the following:

The statement of affairs presents lists of all assets at their book values and also at the values which they might fairly be expected to realize upon a forced sale. Against this showing of the assets, an analysis is set up of all the claims against the business by its outside creditors on the basis of the various classes of creditors referred to above, namely, preference creditors, fully secured creditors, partially secured creditors, and unsecured creditors. Such a statement gives information in such form that it can be used for the purposes enumerated above. There are two forms of presenting this information. In the one the liabilities are shown on the left-hand side and the assets on the right-hand side, as is the case with the English form of balance sheet. The reason sometimes given for this is either that it is analogous to the English form of balance sheet or that in such a case the liabilities may be expected to exceed the assets and are therefore of prime importance. In the other form the assets are shown on the left and the liabilities on the right, as in the usual form of balance sheet. This latter form is the one shown here. The statement of affairs thus ties together the values shown on the balance sheet as taken from the books, with a fair estimate of the values which may be realized, and so indicates the shrinkage in value expected by forced realization of the assets.

Basis of Valuations in Statement of Affairs

The basis for the estimate of valuations is the same as in the case of bankruptcy proceedings where appraisers are appointed to determine the value of properties. Here, however, the matter is not under court control and the best appraisal possible must be made by the parties concerned, although if proceedings have progressed to the point where the appraisers’ report is available, these values may be incorporated. The order of marshalling the assets and liabilities in the statement is not standardized although it would seem best to follow the customary balance sheet order for the assets, running perhaps from the most liquid to the fixed. With the liabilities, those entirely unsecured may be shown first, followed by the partly secured, the fully secured, and the preferred creditors. A comparison of the total values expected to be realized from the sale of the assets with the total of the unsecured creditors gives some indication of the share which each creditor in the unsecured class may expect to receive. The student is referred to the type solution and form shown on pages 635-638.

Statement of Affairs

Deficiency Account

It is customary to support the statement of affairs by a deficiency account, which bears somewhat the same relation to the statement of affairs that the profit and loss account does to the balance sheet, i.e., it is a statement of the expected losses incurred upon realization of the assets and must prove against the losses or deficiency as shown by the statement of affairs. Sometimes on the asset side of the statement of affairs a third column is shown in which is indicated in detail the expected loss on realization for each asset. Where this is done the information which makes up the deficiency account is readily available. On the debit side of the deficiency account appears such items as losses on trading, shrinkages in value of the assets, and, if a partnership, withdrawals of capital. On the credit side appear the capital as shown by the books. The difference between the two sides is the amount of deficiency as shown by the statement of affairs. It may sometimes happen that the assets will realize more than enough to meet the claims of all creditors, leaving a remainder to be distributed among the owners. Where such is the case the deficiency account, instead of being technically described as such, is sometimes called an impairment of capital account—carrying, however, essentially the same information. The balance of the account is on the opposite side and indicates the present capital as impaired by the losses incurred. The skeleton form on page 633 and that given below show the way in which the various items may be presented.

Deficiency Account

Illustration of Statement of Affairs and Deficiency Account

Problem. The following balance sheet shows the condition of the A B C Company as on December 31, 1918.

A B C Company
Balance Sheet, December 31, 1918

The company has had difficulty in meeting its current claims. Interest to the amount of $5,000 on its bonds is past due. On January 10, 1919, it would become liable for $30,000 on accommodation paper to that amount, because of the bankruptcy of the makers. It is estimated that the creditors will receive 50% of their claims. At a meeting of its creditors, where this condition of affairs was disclosed, it was decided to have a statement prepared to show the condition of the company on a liquidating basis, any action respecting a petition in bankruptcy to be deferred until after receipt of such statement. An appraisal committee made the following report, to be used as the basis for the statement.

In the cash are found I O U memos, not collectible, $500. The notes receivable, all estimated good, are pledged with creditors on open account to secure claims of $61,000. Of the accounts receivable, $100,000 are good, $80,000 doubtful, estimated at 50% of their value, and the remainder bad. The merchandise is estimated to bring in $50,000, the machinery $20,000, and the land $125,000. The land and buildings are expected to yield no surplus above the claims of bondholders. The X Y Co. stock is pledged with the holders of notes payable and should produce a surplus of $10,000. The accrued expenses comprise taxes $1,500, unpaid pay-roll $3,500, and bond interest $5,000.

Solution

A B C Company
Statement of Affairs

A B C Company
Statement of Affairs
(Continued)

ABC Co. will be able to pay, on the basis of the above showing, 81.6 cents on the dollar of all unsecured claims.

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.

The theory underlying the account was that it represented the trustee, who was to be charged with all the assets turned over to him and credited with the liabilities assumed. During the process of realization and liquidation he was to be credited in the same account with the assets at the amount realized therefrom, and debited with the liabilities as liquidated. Under this theory, strangely enough, the account was charged also with the expenses incurred by the trustee and credited with any income items received during his trusteeship. The balance of the account was the profit or loss on the realization and liquidation transactions. This theory of the realization and liquidation account as an account actually opened on the books has given place to a second theory, though the account itself as set up for showing solutions to problems set in certified public accountants’ examinations is still sometimes constructed according to this first theory.

The advocates of the second theory maintain that the realization and liquidation account represents the trustee’s report to the court, accounting for the charges and credits therein on that basis. The nature of such a report has been explained earlier in the chapter, from which it is seen that the formal realization and liquidation account as usually set up cannot represent nor take the place of the trustee’s report to the court.

Under a third theory the realization and liquidation account is looked upon simply as a condensed summary of the trustee’s activities analyzed into sections, the purpose of which is to present all the information needed for almost any report which the trustee may have to make. The theory of its debits and credits is not so important here and in some cases may not apply, the effort being simply to arrange the data in such fashion that a full accounting can be given for all the properties turned over to the trustee and all the liabilities assumed by him, the whole being supported by a statement of the trustee’s operations. This information is set up in account form and brought together in one account supplementary to which there must be carried also a summary of the trustee’s cash transactions. The information as given in these two accounts provides the data for any reports which the trustee may have to make. The two forms are shown in skeleton form just below:

In the first example, which may be termed the usual form, the net balance of the account indicates the profit or loss incurred in winding up the business. If the values used as the basis for the statement are those of the statement of affairs, this profit or loss is in addition to the expected loss shown by the deficiency account. If, however, the book values are used as the basis for the statement, the profit or loss will be the net profit or loss on the entire realization and liquidation. Under the new and second form a full accounting is made for the value at which every asset is brought into the statement so that a separate figure of profit or loss is not shown excepting in so far as that is made a part of the operating section of the statement. Sometimes a third form is used which is not a formal statement but consists rather of the auditor’s working sheet. In this, columns are used to show the assets taken over by the trustee; the new assets acquired by him; the realization of the assets; the losses incurred on realization; the net assets remaining to be realized or to be returned to the owner; a similar statement in columnar form showing the liabilities to be liquidated; the full or partial liquidation of the liabilities; and the portion turned back to the owner or continued for further liquidation.

Supporting Schedules

Where the first form of the realization and liquidation statement is made use of, the profit or loss as shown by that statement should be explained by means of a supporting statement known as the realization and liquidation profit and loss account in which will be shown the losses on realization of the assets and any other items which have entered into profit or loss as shown by the realization and liquidation statement. Another schedule known as the trustee’s cash account is also usually presented. In this appears a more or less summarized statement of cash receipts and disbursements, indicating the main lines of activity of the trustee and their results.

The Question of Cash

It is sometimes maintained that inasmuch as cash is a realized asset it has no place in the realization and liquidation statement. Accordingly, under that theory the cash appears only in the trustee’s cash account. There is a good reason, however, for the insistence of some that the realization and liquidation statement should show all the assets taken over by the trustee or receiver and a full accounting for them. Therefore, the cash taken over by the trustee and all subsequent cash acquired by him must be shown in the realization and liquidation statement and fully accounted for as disbursed or still on hand. Inasmuch as the statement has no foundation in practice, it has no standardized form and therefore such matters of opinion will largely be left to the individual student except so far as the force of logic may in the course of time indicate the best method of treatment.

The Handling of Valuation Reserves

In both the statement of affairs and the realization and liquidation statement the handling of valuation reserves presents some difficulty. Either they must be included among the liabilities, which is awkward inasmuch as they cannot be shown as belonging to any of the classes of creditors, or the asset value as set up in the Book Value column must be the value after deducting the reserve therefrom. This latter method, which seems to present the least difficulties and raise the fewest objections, is the one followed here.

Illustration of Realization and Liquidation Statement

Problem. The Kay Corporation became embarrassed because of the tying up of current funds in fixed properties. A friendly receiver was appointed to operate the plant until the assets could be realized upon sufficiently to reduce the most pressing of the claims against the insolvent corporation. At the time the receiver took possession, the balance sheet of the company showed as follows, in summarized form:

Kay Corporation
Balance Sheet

A summary of the receiver’s transactions showed that he made sales of $131,000, of which $51,000 were for cash. He purchased $70,000 worth of merchandise for which he paid $12,500 cash, $25,000 in notes of the corporation, and the rest was carried on account. He bought other property for $20,000, giving therefor $10,000 cash and $10,000 notes. He collected $100,000 cash from customers and wrote off $25,000 as uncollectible. Other property carried on the books at $75,000 was sold for $69,000 cash. He collected from rentals $1,000. Selling expenses amounted to $10,000 and the receiver’s administrative expenses were $7,500, both of which were paid. Of the liabilities he liquidated $70,000 of notes payable and $100,500 of accounts payable. All the accrued expenses were paid. The inventory of merchandise was $20,000 when the receiver turned the property back to the owners.

Set up a realization and liquidation statement and receiver’s cash summary to show the receiver’s stewardship and result of his operations.

Solution

Kay Corporation
Realization and Liquidation Account

Kay Corporation
Realization and Liquidation Account
(Continued)