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:
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Sh
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Sh
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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
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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
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Shop – land and buildings
Furniture and fittings
Stock of goods
Debtors
N. Mwandawiro drawings
Cash on hand
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4,000,000
1,000,000
575,100
641,300
1,314,000
2,000
________
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7,532,400
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7,532,400
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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
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GROSS LIABILITY
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LIABILITIES
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EXPECTED
TO RANK
SHS.
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ASSETS
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ESTIMATED TO PRODUCE
Sh.
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1,848,000
3,410,000
1,296,000
84,000
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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)
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1,848,000
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3,410,000
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4,500,000
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(990,000)
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(100,000)
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306,000
84,000
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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
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2,000
200,000
800,000
60,000
400,000
150,000
50,000
100,000
1,762,000
(84,000)
1,678,000
476,400
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6,658,400
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2,154,400
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2,154,400
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1. Unsecured creditors
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Sh.
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Barclays bank loan
Loan from Paul Nkotei
Loan from Mutiso Kuria
Trade creditors (1,140,000 – 30,000)
Bank overdraft
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600,000
100,000
20,000
1,110,000
18,400
1,848,400
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Assumption: Kuria is married to Mwendawiro’s sister making him a relative by consanguinity.
2. Fully secured creditors
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Liabilities
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Security
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Surplus
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Shop mortgage
Cooperative Bank loan
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3,210,000
200,000
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4,200,000
300,000
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990,000
100,000
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3,410,000
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4,500,000
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1,090,000
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3. Creditors partly secured:
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Liabilities
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Value of Security
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Deficit
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ICDC Loan (1,200 + 96)
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1,296,000
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990,000
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306,000
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4. Preferential creditors
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Sh.
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|
Mombasa municipal council (Note 1)
Salaries and wages payable
NHIF, NSSF & PAYE
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30,000
18,000
36,000
84,000
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DEFICIENCY ACCOUNT
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Sh.
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Sh.
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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
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1,200,000
360,000
1,560,000
200,000
50,000
476,400
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Estimated Loss on realization of assets:
Furniture
Stock 200,000
Debtors 375,100
(641,300–400,000–150,000) 91,300
Mortgage interest
ICDC loan interest
Drawings
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210,000
96,000
1,314,000
_______
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2,286,400
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2,286,400
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The format for the statement of affairs and surplus or deficiency account of a partnership will be as follows:
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STATEMENT OF AFFAIRS
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Joint
Estate
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A
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B
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Joint
Estate
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A
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B
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Unsecured creditors
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x
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x
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x
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Assets not specifically
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|
|
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Creditors fully secured
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x |
x |
x |
Pledged
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x
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x
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x
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Less value of security
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(x)
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(x)
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(x)
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Surplus from creditors
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|
|
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Surplus below/contra
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x
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x
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x
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Fully secured
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|
x
|
x
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Creditors partly secured
|
x
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x
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Preferential creditors
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Less value of security/surplus b/d
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(x)
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(x)
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deducted per contra
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(x)
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(x)
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(x)
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x
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x
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Surplus from B’s
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|
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Preferential creditors
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Personal estate
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x
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Deducted per contra
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x
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x
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x
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Deficiency as per deficiency a/c
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x
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x
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Surplus as per surplus a/c
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x
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xx
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xx
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xx
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xx
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xx
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xx
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SURPLUS/DEFICIENCY A/C
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Joint
Estate
|
A
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B
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Joint
Estate
|
A
|
B
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Excess of assets over
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|
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Est. loss on realization
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Liabilities
|
x
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x
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x
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Of assets
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x
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x
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x
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Est. surplus on realization
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Loss on guarantee
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x
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Of assets
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x
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x
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x
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Loss of partnership
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Surplus from B’s Estate
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x
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Capital
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x
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x
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Deficiency as per
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Surplus as per
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Statement of affairs
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x
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x
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Statement of affairs
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x
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xx
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xx
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xx
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xx
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xx
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xx
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Solution
|
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)
|
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
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
|
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
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
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Surplus as per surplus a/c
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|
|
x
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|
|
|
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|
|
xx
|
xx
|
xx
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|
xx
|
xx
|
xx
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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
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Statement of affairs
|
|
|
x
|
|
|
xx
|
xx
|
xx
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xx
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xx
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xx
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