Items reducing the deficit-liquidation of companies, Financial Accounting

Items reducing the deficit:

Items reducing the deficit would include:

(a)    Profits from trading;
(b)    Estimated profit on the realisation of assets.

Notes:

(a) Where an examination question fails to give you a balance sheet at the date of the receiving order, you should draw up a "rough" balance sheet to provide the basis for agreeing the deficiency shown in the statement of affairs with that in deficiency account.

(b) Preparation of the statement of affairs and the deficiency account is based on "double entry" principles.

i. Items not in the balance sheet must have a debit and credit within the statement of affairs and deficiency account.

ii. Where the estimated realisable value of an asset differs from its book value i.e. the value at which it appears in the balance sheet given or computed as in (i) above, the difference must be reflected in the deficiency account.

  • An estimated loss is put on the right-hand side;
  • An estimated surplus is put on the left-hand side.
  • A landlord may recover by distress rent outstanding in respect of the period, not exceeding six months, prior to adjudication (date debtor declared bankrupt). If the landlord distrains he effectively removes assets to satisfy the outstanding rent and can therefore be considered in the same category as a secured creditor.  Do NOT assume distraint unless the question clearly states this course of action.  In other cases treat the rent outstanding as an ordinary creditor.
  • Deferred creditors do not become entitled to any dividend at all until the unsecured creditors have received payment in full; however include them in the unsecured creditors in the Statement of Affairs and put in a note on the Statement of Affairs.  If there is any surplus, the deferred creditors will rank against it to the full extent of their debts before any return is made to the debtor.  This point is seldom relevant to examination problems.
Posted Date: 12/13/2012 3:05:32 AM | Location : United States







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