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:

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

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

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

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.

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

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

STATEMENT OF AFFAIRS

Joint

Estate

Joint

Estate

Unsecured creditors

Assets not specifically

Creditors fully secured

Pledged

Less value of security

(x)

Surplus from creditors

Surplus below/contra

Fully secured

Creditors partly secured

Preferential creditors

Less value of security/surplus b/d

(x)

deducted per contra

(x)

Surplus from B’s

Preferential creditors

Personal estate

Deducted per contra

Deficiency as per deficiency a/c

Surplus as per surplus a/c

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

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.

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

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

STATEMENT OF AFFAIRS

Joint

Estate

Joint

Estate

Unsecured creditors

Assets not specifically

Creditors fully secured

Pledged

Less value of security

(x)

Surplus from creditors

Surplus below/contra

Fully secured

Creditors partly secured

Preferential creditors

Less value of security/surplus b/d

(x)

deducted per contra

(x)

Surplus from B’s

Preferential creditors

Personal estate

Deducted per contra

Deficiency as per deficiency a/c

Surplus as per surplus a/c

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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