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?