Question

John Hepworth, the sole proprietor of John’s Variety, is having some difficulty with his retail store. He’s concerned about the possibility of having to close it. He knows that the value of his business as an ongoing entity is not worth much because of the minimal level of profit that his store has shown over the past two years. He’s now thinking seriously about getting out of the business by liquidating his assets and paying his creditors in full. His bank manager informed him that if he liquidates his assets, he would probably get 60% for his non-current assets, no more than 40% for his inventories, and 65% of the trade receivables amount shown on his statement of financial position as at December 31, 2013.
John was hoping to obtain at least $50,000 after liquidation. With the information below, prepare the following:
• John’s statement of financial position as at December 31, 2013.
• John’s revised statement of financial position if he were to liquidate his business.
Accounts Amounts
Revenue................. $3,000,000
Inventories ................ 200,000
Share capital ................ 150,000
Accumulated depreciation ......... 200,000
Distribution costs ............. 130,000
Cash .................. 10,000
Marketable securities ............. 50,000
Retained earnings ............ 385,000
Trade and other payables ......... 150,000
Accrued expenses ............. 50,000
Taxes payable ............. 25,000
Other current assets ........... 25,000
Long-term borrowings .......... 350,000
Non-current assets (at cost) ........ 900,000
Trade receivables ............. 300,000
Short-term borrowings ......... 175,000

1. What is John’s book value?
2. What is John’s liquidation value?
3. Will John have enough money to pay all his creditors?
4. If John’s business cannot cover all his liabilities, what will he have to do?



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  • CreatedDecember 03, 2014
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