Illustration of bankruptcy, Financial Accounting

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Illustration of Bankruptcy

Njuguna Mwandawiro, carrying on a business as a trader in Likoni, Mombasa, finds himself insolvent, and on 15 August 1997 files his petition in bankruptcy. The following balances are extracted from the books of his business on that date:

 

Sh

 

Sh

N. Mwandawiro Capital

Mortgage on shop (land and buildings)

Loan – I.C.D.C. Ltd.

Loan – Barclays Bank Ltd.

Loan – Co-operative Bank Ltd.

Loan – Paul Nkobei

Loan – Mutiso Kuria

Trade creditors

N.H.I.F., N.S.S.F. and P.A.Y.E.

Salaries and wages payable

Bank overdraft

1,200,000

3,000,000

1,200,000

600,000

200,000

100,000

20,000

1,140,000

36,000

18,000

     18,000

Shop – land and buildings

Furniture and fittings

Stock of goods

Debtors

N. Mwandawiro drawings

Cash on hand

4,000,000

1,000,000

575,100

641,300

1,314,000

2,000

 

 

 

 

________

 

 7,532,400

 

 7,532,400

 



The following information is provided:

1. The trade creditors includes Sh.30,000 owing to Mombasa Municipal  Council in respect of rates in for the current period and a small loan from Mwandawiro’s friend Waititu for Sh. 10,000.
2. The amount owing for salaries and wages and statutory payroll deductions are for 1997.
3. There is 210,000 interest unpaid on the mortgage as at 15 August 1997, which has not been recorded in the books.
4. The loan from I.C.D.C. Ltd. is secured by a second mortgage on the shop (land and buildings). The unrecorded interest owing as at 15 August 1997 was Sh.96,000.
5. The loan from the Co-operative Bank Ltd. was obtained when Mwandawiro pledged his wholly owned piece of land as security. The value of the piece of land is sh.300,000. There is no interest outstanding on his loan.
6. The interest on loan from Paul Nkobei was to vary with profits, but since the business has beeb operating at a loss, there is no interest due.
7. There is no interest outstanding on the loan from Barclays Bank Ltd.
8. Mutiso Kuria is Mwandawiro’s brother-in-law.
9. The value of the assets is estimated to be:

    Sh.
Shop – land and buildings
Furniture and fittings
Stock of goods    4,200,000
800,000
200,000

10. Of the debtors, Sh.400,000 are thought to be good and Sh.200,000 doubtful, of which Sh.150,000 should be collectable.
11. Mwandawiro’s uncle died recently and he will be receiving Sh.50,000 as an inheritance.
12. Mwandawiro has no personal creditors outside the business, but he has other personal assets, beside the piece of land, amounting to Sh.60,000, exclusive of household and personal effects.

Required:

(a) A statement of affairs for Njuguna Mwandawiro as at 15 August 1997 in good form                                                           
(b) A deficiency account as at that date.                                       
(c) A profit and loss account for the period ended 15 August 1997.        
                                          

 

Solution

NJUGUNA MWANDAWIRO

STATEMENT OF AFFAIRS AS AT 15 AUGUST 1997

 

GROSS LIABILITY

LIABILITIES

EXPECTED

TO RANK

SHS.

ASSETS

ESTIMATED TO PRODUCE

Sh.

1,848,000

 

3,410,000

 

 

 

 

 

1,296,000

 

 

 

 

 

     84,000

Unsecured creditors (W1)

Fully secured creditors (W2)

Less: value of security

        Surplus below

        Surplus per contra

 

Partly secured creditors (W3)

Deduct surplus from above)

Deficiency ranking unsecured

Preferential creditors deducted per contra (W4)

1,848,000

 

3,410,000

 

4,500,000

  (990,000)

  (100,000)

 

1,296,000

 

  (990,000)

 

   306,000

 

     84,000

 

Cash on hand

Stock

Furniture

Personal assets

Debtors – Good

       Doubtful 

       Bad             

                       

Estimated to produce

Inheritance receivable

Surplus from fully secured creditors per contra

 

Preferential as per contra

 

Deficiency as per deficiency account

     2,000

   200,000

   800,000

     60,000

   400,000

200000

41300

241300

   150,000

     50,000

 

 

   100,000

1,762,000

 

    (84,000)

1,678,000

 

   476,400

 

6,658,400

 

2,154,400

 

2,154,400

WORKINGS

 

1.          Unsecured creditors

 

 

Sh.

Barclays bank loan

Loan from Paul Nkotei

Loan from Mutiso Kuria

Trade creditors (1,140,000 – 30,000)

Bank overdraft

   600,000

   100,000

     20,000

1,110,000

     18,400

1,848,400

 

Assumption:  Kuria is married to Mwendawiro’s sister making him a relative by consanguinity.

 

 

 

 

 

 

 

2.          Fully secured creditors

 

 

Liabilities

Security

Surplus

Shop mortgage

Cooperative Bank loan

3,210,000

   200,000

4,200,000

   300,000

   990,000

   100,000

 

3,410,000

4,500,000

1,090,000

 

 

3.       Creditors partly secured:

 

 

Liabilities

Value of Security

Deficit

ICDC Loan (1,200 + 96)

1,296,000

990,000

306,000

 

 

4.          Preferential creditors

 

 

Sh.

Mombasa municipal council (Note 1)

Salaries and wages payable

NHIF, NSSF & PAYE

30,000

18,000

36,000

84,000

 

 

DEFICIENCY ACCOUNT

 

Sh.

 

Sh.

Excess of business assets over liabilities

Excess of private assets over liabilities

 

Estimated surplus:

   On realization on land & buildings

   Gift from uncle by will

 

Deficiency as per statement of account

 

1,200,000

   360,000

1,560,000

 

200,000

50,000

 

 

 

  476,400

Estimated Loss on realization of assets:

     Furniture

     Stock                                  200,000

     Debtors                              375,100

     (641,300–400,000–150,000)   91,300

Unrecorded expenses

Mortgage interest

ICDC loan interest

Drawings

 

 

 

 

 

 

210,000

96,000

1,314,000

 

_______

 

2,286,400

 

2,286,400

 

The format for the statement of affairs and surplus or deficiency account of a partnership will be as follows:


 

STATEMENT OF AFFAIRS

 

Joint

Estate

A

B

 

Joint

Estate

A

B

Unsecured creditors

x

x

x

Assets not specifically

 

 

 

Creditors fully secured

 

 
x

 

 
x

 

 
x

Pledged

x

x

x

Less value of security

(x)

(x)

(x)

Surplus from creditors

 

 

 

Surplus below/contra

x

x

x

Fully secured

 

x

x

 

Creditors partly secured

 

 

x

 

 

x

 

 

Preferential creditors

 

 

 

Less value of security/surplus b/d

 

(x)

 

(x)

 

deducted per contra

(x)

(x)

(x)

 

x

x

 

Surplus from B’s

 

 

 

Preferential creditors

 

 

 

Personal estate

x

 

 

Deducted per contra

x

x

x

Deficiency as per deficiency a/c

 

x

 

x

 

Surplus as per surplus a/c

 

 

x

 

 

 

 

 

xx

xx

xx

 

xx

xx

xx

 

 

 

 

 

 

 

 

 

SURPLUS/DEFICIENCY A/C

 

Joint

Estate

 

A

 

B

 

Joint

Estate

 

A

 

B

Excess of assets over

 

 

 

Est. loss on realization

 

 

 

Liabilities

x

x

x

Of assets

x

x

x

Est. surplus on realization

 

 

 

Loss on guarantee

 

x

 

Of assets

x

x

x

Loss of partnership

 

 

 

Surplus from B’s Estate

x

 

 

Capital

 

x

x

Deficiency as per

 

 

 

Surplus as per

 

 

 

Statement of affairs

x

x

 

Statement of affairs

 

 

x

 

xx

xx

xx

 

xx

xx

xx

 

 

Solution

NJUGUNA MWANDAWIRO

STATEMENT OF AFFAIRS AS AT 15 AUGUST 1997

 

GROSS LIABILITY

LIABILITIES

EXPECTED

TO RANK

SHS.

ASSETS

ESTIMATED TO PRODUCE

Sh.

1,848,000

 

3,410,000

 

 

 

 

 

1,296,000

 

 

 

 

 

     84,000

Unsecured creditors (W1)

Fully secured creditors (W2)

Less: value of security

        Surplus below

        Surplus per contra

 

Partly secured creditors (W3)

Deduct surplus from above)

Deficiency ranking unsecured

Preferential creditors deducted per contra (W4)

1,848,000

 

3,410,000

 

4,500,000

  (990,000)

  (100,000)

 

1,296,000

 

  (990,000)

 

   306,000

 

     84,000

 

Cash on hand

Stock

Furniture

Personal assets

Debtors – Good

       Doubtful 

       Bad             

                       

Estimated to produce

Inheritance receivable

Surplus from fully secured creditors per contra

 

Preferential as per contra

 

Deficiency as per deficiency account

     2,000

   200,000

   800,000

     60,000

   400,000

200000

41300

241300

   150,000

     50,000

 

 

   100,000

1,762,000

 

    (84,000)

1,678,000

 

   476,400

 

6,658,400

 

2,154,400

 

2,154,400

WORKINGS

 

1.          Unsecured creditors

 

 

Sh.

Barclays bank loan

Loan from Paul Nkotei

Loan from Mutiso Kuria

Trade creditors (1,140,000 – 30,000)

Bank overdraft

   600,000

   100,000

     20,000

1,110,000

     18,400

1,848,400

 

Assumption:  Kuria is married to Mwendawiro’s sister making him a relative by consanguinity.

 

 

 

 

 

 

 

2.          Fully secured creditors

 

 

Liabilities

Security

Surplus

Shop mortgage

Cooperative Bank loan

3,210,000

   200,000

4,200,000

   300,000

   990,000

   100,000

 

3,410,000

4,500,000

1,090,000

 

 

3.       Creditors partly secured:

 

 

Liabilities

Value of Security

Deficit

ICDC Loan (1,200 + 96)

1,296,000

990,000

306,000

 

 

4.          Preferential creditors

 

 

Sh.

Mombasa municipal council (Note 1)

Salaries and wages payable

NHIF, NSSF & PAYE

30,000

18,000

36,000

84,000

 

 

DEFICIENCY ACCOUNT

 

Sh.

 

Sh.

Excess of business assets over liabilities

Excess of private assets over liabilities

 

Estimated surplus:

   On realization on land & buildings

   Gift from uncle by will

 

Deficiency as per statement of account

 

1,200,000

   360,000

1,560,000

 

200,000

50,000

 

 

 

  476,400

Estimated Loss on realization of assets:

     Furniture

     Stock                                  200,000

     Debtors                              375,100

     (641,300–400,000–150,000)   91,300

Unrecorded expenses

Mortgage interest

ICDC loan interest

Drawings

 

 

 

 

 

 

210,000

96,000

1,314,000

 

_______

 

2,286,400

 

2,286,400

 

The format for the statement of affairs and surplus or deficiency account of a partnership will be as follows:


 

STATEMENT OF AFFAIRS

 

Joint

Estate

A

B

 

Joint

Estate

A

B

Unsecured creditors

x

x

x

Assets not specifically

 

 

 

Creditors fully secured

 

 
x

 

 
x

 

 
x

Pledged

x

x

x

Less value of security

(x)

(x)

(x)

Surplus from creditors

 

 

 

Surplus below/contra

x

x

x

Fully secured

 

x

x

 

Creditors partly secured

 

 

x

 

 

x

 

 

Preferential creditors

 

 

 

Less value of security/surplus b/d

 

(x)

 

(x)

 

deducted per contra

(x)

(x)

(x)

 

x

x

 

Surplus from B’s

 

 

 

Preferential creditors

 

 

 

Personal estate

x

 

 

Deducted per contra

x

x

x

Deficiency as per deficiency a/c

 

x

 

x

 

Surplus as per surplus a/c

 

 

x

 

 

 

 

 

xx

xx

xx

 

xx

xx

xx

 

 

 

 

 

 

 

 

 

SURPLUS/DEFICIENCY A/C

 

Joint

Estate

 

A

 

B

 

Joint

Estate

 

A

 

B

Excess of assets over

 

 

 

Est. loss on realization

 

 

 

Liabilities

x

x

x

Of assets

x

x

x

Est. surplus on realization

 

 

 

Loss on guarantee

 

x

 

Of assets

x

x

x

Loss of partnership

 

 

 

Surplus from B’s Estate

x

 

 

Capital

 

x

x

Deficiency as per

 

 

 

Surplus as per

 

 

 

Statement of affairs

x

x

 

Statement of affairs

 

 

x

 

xx

xx

xx

 

xx

xx

xx

 


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