The statement of affairs shown on page 166 is ar ranged to disclose the exact status of the firm on the date of December 15. The left-hand side of the state ment shows in one column the nominal or book value of the assets. The second column shows the amount that we expect these assets to realize. Creditors are not much interested in the book value of the assets, but they are interested to know how much they may ex pect to realize from these assets. The total of this column after deducting preferential claims is $27, 250. On the right-hand side of the statement are shown the liabilities. We have there also two col umns, one showing the total or book liabilities and the other the amount the liabilities are expected to rank. It will be noticed that the secured creditors are omitted entirely, since they are not expected to rank to any amount as they are fully secured.
The partially secured creditors are shown in the total liabilities column for the full amount, while in the column "expected to rank" only $20,900 as the securities in their possession as part pledge are esti mated at $3,000. Preferential claims are entered only in the total liability column because they have been deducted from the total assets. The total of the column "expected to rank" amounts to $45,900. As the assets available for distribution amount to only $27,250, we have a deficiency of $18,650, which is ac counted for and explained in the deficiency account shown on page 167.
This account begins on the debit side with the capi tal brought into the business at commencement, amounting to $26,050. On the credit side are entered the losses on trading, as well as the trading expenses, making the total $20,900. The second part on the same side deals with the losses and shrinkages in values which amount to $6,400. Finally are entered the withdrawals amounting to $17,400, thus showing a total on the credit side amounting to $44,700. Against this is the capital only, amounting to $26,050, hence there is a deficiency amounting to $18,650, which is the exact sum shown on the statement of affairs.
12. Realization, and liquidation account.—The statement of affairs sets forth what the receiver may expect to accomplish on the basis of forced liquida tion. If, after the receiver's report has been sub mitted, the creditors decide to wind up the affairs of the insolvent business, the receiver realizes on the assets and pays out the claims against the insolvent estate in the order of their rank. He disposes of the assets, debiting his cash account for the amount re ceived on realization and crediting the individual asset accounts. As claims are paid off, the appropriate liability accounts are debited cash account is credited. After all the assets have been sold and the proceeds applied in the liquidation of the liabili ties, the accounts remaining open on the ledger will be the balances in the asset accounts, representing the excess or deficit of book value on realization, and the unliquidated liabilities and the capital accounts of the proprietor or partners, or the capital stock and sur plus accounts of a corporation.
The losses on winding up should be charged to the capital account of a sole proprietor or to the capi tal accounts of partners in a partnership; in corpora tions, the losses will be charged against surplus. The stockholders in a corporation will surrender their shares of capital stock, which will be debited to capi tal account and credited to surplus. If the realiza
tion is conducted at a loss, the amount of unliquidated liabilities will of course equal the debit balance in the capital account of a sole trader or the debit balances in the accounts of partners; in a corporation, the debit balance in the surplus account will be equal to the amount of the unliquidated liabilities.
Should the receiver be fortunate enough to con duct the realization so as to obtain a surplus over the book value of the assets at the time of sale, such ex cess will be credited to the surplus or individual capi tal accounts. Very often the receiver will open up a "winding-up" account thru which the closing opera tions will be entered.
13. Form of realization and liquidation account.— The form of realization and liquidation account used by teachers of accounting and employed in C. P. A. examinations is not a practical statement. It is made up in either account or statement form. If the ac count form is used, the realization and liquidation ac count is debited with the assets to be realized and credited with the liabilities to be liquidated. Cash on hand is not included in the assets to be realized because cash is already realized. The statement is then credited with the assets realized and debited with the liabilities liquidated. Any expenses of the re ceiver in connection with realization and liquidation are debited to the account under the caption "supple mentary debits"; any income collected by the receiver after he takes' charge is credited to the account under the caption "supplementary credits." At the date of the accounting, the assets not realized are credited to the account and the liabilities not liquidated are debited to the account. The difference between the debit and credit sides of the account will then represent the profit or loss to date on realization and liquidation. This account will not, however, show the details of the profit or loss on realization and it is customary to supply a realization profit-and-loss account show ing the details; this statement may of course be rec onciled with the profit or loss shown in the realiza tion and liquidation account.
The cash transactions of the receiver are shown in a separate cash account because he is usually paid on the basis of the cash received and paid out. The re ceiver's cash account will start with the balance on hand at the time he took charge; it will be debited with the proceeds of the assets realized and with any in come received by him during realization ; it will be credited with the liabilities liquidated and with any expenses paid during realization. The balance of the two sides of the account may be reconciled with the cash in the hands of the receiver. If the liquidation has not been completed at the date of the accounting, it is customary to prepare a receiver's balance sheet which will show the cash and other assets on hand at the date of the accounting; the liabilities unliqui dated will be stated and the difference between the two sides will represent the profit or loss on realiza tion and liquidation to the date of the accounting, as suming that the remaining assets will be liquidated at the values shown in the books of the undertaking.
For the purpose of illustrating the preparation of the realization and liquidation account, attention is called to the following problem and solution: