Objectives
At the end of this lecture you will be able to:
§ Describe the terms statement of affairs and deficiency account
§ Identify the contents of statement of affairs
§ Prepare a statement of affairs and deficiency account for a sole
proprietorship
Contents
§ Meaning of statement of affairs and deficiency account
§ The content of statement of affairs
§ Preparation of statement of affairs and deficiency account for a
sole proprietorship
Introduction
The sole trader is defined as a one man’s business whereby the
owner enjoys his profits and suffers losses alone. In law a sole trader suffers
what is called unlimited liability, which means that during failure to pay his
obligation, his personal properties are not distinguished from being sold to
recover the debts. In bankruptcy of a sole trader, provisions in this Act will
be applicable.
The statement of Affairs:
Upon bankruptcy, the statement of affairs shall be prepared on a
prescribed form, sets out debtors (the bankrupt person) position on the day of
the receiving order. The statement will show:
i.
His assets,
both business and personal at values which estimates that these assets will
realise without including, however any additional assets that the trustee may
be able to recover either under reputed ownership or by impeaching or avoiding
voidable disposition
ii.
The
liabilities outstanding on the day of the receiving order, which are to be paid
out of the amounts so realised
iii.
The
estimated deficiency being the extent by which the liabilities exceed the
amount expected to be realised from the assets
The statement of Affairs is to be supported by eleven prescribed
schedules, which are identified as lists A to K containing the following
information:
List A: Unsecured Creditors
List B: Creditors fully secured
List C: Creditors partially secured
List D: Contingent and other liabilities
List E: Preferential Creditors
List F; Liabilities of debtor on bills than his own acceptance
List G: Creditors for rent
List H: Property: This list is to contain full particulars of
every description of property in possession or reversion. The official form has
columns for the following property in particular:
Cash at bank, Cash in hand, cash deposited with advocate for cost
of petition, stock in trade I n the country, stock in trade=de and goods in
transit, machinery, trade fixtures, utensils etc, farming stock, growing crops
where no owner of the land, household furniture and effects
Deficiency Account
The deficiency account is the 11th schedule supporting
the statement of affairs. The deficiency account is expected to explain how
exactly the deficiency revealed in the statement of affairs has arisen: The
following are the steps in the preparation of Deficiency account:
- Prepare the net
assets position of the bankrupt person on the date twelve months before
the date of receiving order
- Next, show how
this position improved since then, any business net profits and income
from other sources
- Demarcate there
after the reasons for the deterioration of the position, culminating in
the specific deficiency on the day of the receiving order. Reasons for the
deteriorating in the bankruptcy person’s position may be classified under;
a) Business losses
b) Drawings for household realisation of the property
c) Anticipated net losses in realisation of the property
d) Any contingent liabilities materialising
The responsibility of preparing the deficient account together
with the statement of of affairs, usually assigned to the accountant where
accounting records have been maintained on double entry basis and a balance
sheet has been extracted as on the date of receiving order, the preparation of
the statement of affairs and the deficiency account is merely a matter of
copying the figures on the balance sheet into either the Statement of Affairs
or the deficiency account or partially into each of them
Example 1:
Receiving order was served on a bankrupt person on 1st
April 2013. Summarised balance sheet of his business on that date was as
follows:
Balance sheet as at 1 May 2013
Capital 50,000 , 000 Assets 200,000,000
Liabilities 150,000,000
200,000,000 200,000,000
Additional information:
The Assets are expected to realise Tshs. 60,000,000 only
Required:
a)
Prepare the
Statement of Affairs as at 1 May 2013
b)
Prepare a
deficiency Account as at 1 may 2013
Solution:
Statement
of Affairs as at 1 May 2013
Liabilities 150,000,000 Assets
60,000,000
Deficiency 90,000,000
150,000,000 150,000,000
Deficiency
Account
Capital 50,000,000 Anticipated to realise 140,000,000
Deficiency *90,000,000
140,000,000 140,000,000
NB:
The * was computed by taking the difference between the figures copied on to
either side of the statement of affairs
Important
Points to Note:
- From
the answers above, the figure of capital and liabilities appearing on the
left hand side of the balance sheet have been copied to the same side of
the deficiency account and the statement of affairs respectively
- The
figure of assets appearing on the right hand side of the balance sheet,
the assets are expected to realise, on to the same side of the statement
of affairs, while the balance (being loss anticipated is copied onto the
same side of the deficiency account
- Since
the figures on either side of the balance sheet added up to the same
total, and since these figures and no other have been copied on to either
of the two new statements without altering the sides. It is inevitable
that any difference arising between the figure recorded on the two sides
of the statement of affairs be exactly equal and opposite to the
difference similarly in respect of the deficiency account
- The
statement of affairs clearly shows the bankrupt position on 1st
May. It reveals that his assets being expected to realise only Tshs.
60,000,000 would be incapable of meeting his liabilities reckoned at Tshs.
150,000,00 and leaves a deficiency of Tshs.90,000,000
- In
the event the assets realised Tshs. 60,000,000 as anticipated by the
bankrupt person, and no expenditure whatsoever is incurred in the course
of realising them, the bankrupt person will be in a position to meet only
40% of his liabilities
- Generally,
the deficiency account explains how the deficiency of Tshs. 90,000,000
arose. The bankrupt person net assets position represented by his capital,
of Tshs. 50,000,000 falls short of the anticipated Tshs. 140,000,000 loss
on realising the assets by that amount
The
deficiency account drawn in respect of this specific illustrative example is
defective in that it attempts to explain the bankrupt person’s deficiency by
merely matching his net assets position on the same day of the receiving order
with factors that aggravated the same
Under
the laws relating to bankruptcy, the deficiency account is expected to commence
with the net assets position of the bankruptcy twelve months before the date of
the receiving order and proceeds to quantify the various factors that aggravated
it, resulting in the particular deficiency on the date of receiving order
This
additional requirement does not however, constitute serious problem, because
the information necessary for complying with this requirements is usually
contained in every balance sheet by the way of explaining the movements of
capital during the year.
Preparation
of the statement of affairs and deficiency account still remaining the exercise
of copying the figures appearing on the balance sheet on the same side of the appropriate
statements
Example
2.
Receiving order was served on a bankrupt person on 1st
April 2013. Summarised balance sheet of his business on that date was as
follows:
Balance sheet as at 1 May 2013
Capital 50,000 , 000 Machinery 50,000,000
Net Loss
(30,000,000) Furniture 50,000,000
Drawings
(25,000,000) Motor Vehicles 80,000,000
Liabilities 150,000,000 Fixtures &Fittings
20,000,000 200,000,000 200,000,000
The assets are expected to realise as follows:
Machinery 20,000,000; Furniture 10,000,000, Motor Vehicles 25,000,000 and
Fixtures &Fittings 5,000,000,000
Required:
(i)
Prepare Statement of
Affairs as at 1st May 2013
(ii)
Prepare Deficiency Account as at 1st
May 2013
Solution
Statement of Affairs as at 1 May 2013
Liabilities 150,000,000 Machinery 20,000,000
Furniture 10,000,000
Motor
Vehicles 25,000,000
Fixtures 5,000,000
Deficiency 90,000,000
150,000,000 150,000,000
Deficiency Account for the year ended 1
May 2013
Capital 105,000,000 Net Loss for the year
30,000,000
Deficiency 90,000,000 Drawings 25,000,000
Anticipated
Loss on
Realising
the Assets 140,000,000
195,000,000 195,000,000
Explanations
to Note:
The
difference between the dating of the titles to the two new statements may be
carefully noted. While the statement of affairs shows the position of the
bankrupt person as at 1 May 2013, the deficiency account explains how the deficiency
arose during the ending year on 1 May 2013
Information
that has to be recorded on the statement of affairs and deficiency account is
not always reflected on the balance sheet. For example, upon his adjudication,
the bankrupt person will have no surrender to his trustee, not only his
business assets, but also his personal assets, which would obviously not
reflected on the balance sheet prepared in respect of his business on the day
of his receiving order
Where
such information outside the balance sheet has to be taken into account of ,
care must be taken to ensure that the information is reflected both on the
statement of affairs and on the deficiency account on opposite sides, so that
the two entries recording the information corresponds to the two legs of the
double entry system. If we assume for example, that the only person assets the
bankrupt person has is a life policy with a surrender value of 5,000,000 this
amount will have to be recorded:
(i)
On the right hand side
of the statement of affairs to record the additiona property available for
realisation
(ii)
On the left hand side
of the deficiency account to show that the bankrupt person’s net asset position
improves by that amount
Likewise
if the bankrupt person has a personal liability its amount will have to be
stated both on the left hand side of the statement of affairs and as a
deduction from the net asset position reflected on the deficiency account
Example
3
On
1 May 2013, when the receiving order was made on the bankrupt person, the his
balance sheet appeared as follows:
Balance sheet as at 1 May 2013
Capital 105,000 000 Machinery 50,000,000
Net Loss (30,000,000) Furniture 50,000,000
Drawings (25,000,000) Motor Vehicles 80,000,000
Liabilities 150,000,000 Fixtures &Fittings 20,000,000 200,000,000 200,000,000
The
following additional information was also available:
(i)
The assets of the
business are expected to realise as follows: Machinery 20,000,000; Furniture
10,000,000, Motor Vehicles 25,000,000 and Fixtures &Fittings 5,000,000,000
(ii)
On the same date,
personal property of the bankrupt person consisted of Tshs. 20,000,000 and his personal insurance policy of Tshs 5,000,000
(iii)
Tshs. 2,500,000 was in his personal bank account
(iv)
He owes Tshs.
16,000,000 to Musoma Foods Ltd in respect of household provisions acquired for
his family
Required:
a) Prepare
Statement of Affairs as at 1st May 2013
b) Prepare
Deficiency Account as at 1st May 2013
Solution
Statement of Affairs as at 1 May 2013
Liabilities 150,000,000 Machinery 20,000,000
Musoma
Foods Ltd 16,000,000 Furniture 10,000,000
Motor
Vehicles 25,000,000
Fixtures 5,000,000
Personal
Property 20,000,000
Life
Policy 5,000,000
Cash
–personal 2,500,000
Deficiency 78,500,000
166,000,000 166,000,000
Deficiency Account for the year ended 1
May 2013
Capital 105,000,000 Net Loss for the year
30,000,000
Personal
Assets 27,500,000
Less:
Personal Liabilities
(16,000,000)
Deficiency 78,500,000 Drawings 25,000,000
Anticipated Loss on
Realising the Assets
140,000,000
195,000,000 195,000,000
Explanations:
From
the solution above, it will be observed that the bankruptcy law does not
distinguish between personal assets and liabilities and those of the business
(Unlimited liabilities). All assets together are expected to realise only Tshs.
87,500,000 where as total liabilities amount to Tshs. 166,000,000 leaving a
deficiency of Tshs. 78,500,000. The deficiency account has clearly explained
how the figure has arisen
It
may be remembered that certain business liabilities capable of proving in
bankruptcy may not be reflected on the balance sheet of the business, for
example, since the bankruptcy will necessarily entail cessation of the business
and hence discharge the employees, compensation will become payable to the
employees, but the payments of such compensation being contingent on cessation
of business, the amount of this liability will not be reflected on the balance
sheet as at 1st April 2013. Further examples of such contingent
liabilities not reflected on the balance sheet are:
- Bills discounted on which the business may
remain liable either a drawer or endorse
- Claims for damages pending decision by court
All
such contingent liabilities being not reflected on the balance sheet, will have
to be recorded by stating the amount of such liability both on the left hand
side of the statement of affairs recording an additional liability to be
discharged and on the right hand side of the deficiency account (recording
additional factor that aggravate the net asset position and precipitated the deficiency).
Example
4
Receiving
order was made on the bankrupt person on 1 May 2013. The position of his
business on that date was as follows:
Balance sheet as at 1 May 2013
Capital 150,000,000 Motor vehicles 140,000,000
Net
loss (30,000,000) Stock in trade 35,000,000
Drawings (25,000,000) Trade debtors 20,000,000
Industrial
bank loan 50,000,000 Cash
in hand 5,000,000
Current
liabilities 100,000,000
200,000,000 200,000,000
It
has been ascertained that:
(i)
The motor vehicle which was involved in
accident could only be realised for Tshs. 14,000,000; Stock in trade may be
realised at 10% more tan the cost. Tshs. 500,000 of the debtors alone are
expected to be good, and Tshs. 9,500,000 regarded as irrecoverable, while 80%
of the balnce appears to be in doubt
(ii)
CRDB bank loan, on which interest
accrues at 9% per annum, is secured on the vehicle
(iii)
Current liabilities include Tshs.
6,000,000 payable as interest on the industrial bank loan and Tshs. 19,000,000
payable in priority to other:
(iv)
Consequent to bankruptcy Tshs.
32,000,000 would become payable to the employees as compensation
(v)
Personal property of the bankrupt person
consists of a life polict valued at Tshs. 25,000,000 and tshs. 2,500,000 in a
personal bank account together with Tshs. 16,000,000 owing to Musoma Ltd. In
respect of household provisions acquired for the family
Required:
a) Prepare
the Statement of Affairs as at 1 May 2013
b) Deficiency
account as at 1 May 2013
Statement
of Affairs as at 1st May 2013
Unsecured Creditors
Liabilities-business 75,000,000 Stock in trade 38,500,000
Compensation
to employment32, 000,000 Trade debtors
*2,500,000
Musoma
Foods Ltd 16,000,000 Cash-business 5,000,000
Secured Creditors Cash-personal
2,500,000
CRDB
Bank loan 50,000,000 Life Policy 25,000,000
Interest
Outstanding 6,000,000 Less:
Pref.Creditors (19,000,000)
56,000,000 54,500,000
Less:
Motor Vehicle (14,000,000) Deficiency 110,000,000
165,000,000 165,000,000
Deficiency
Account for Year Ended 1 May 2013
Capital 105,000,000 Net Loss 30,000,000
Personal 27,500,000 Drawings 25,000,000
Less:
Liability 16,000,000 11,500,000 Motor Vehicles
126,000,000
Deficiency 110,000,000 Trade Debtors 17,500,000
143,500,000
Less Gain on Stock (3,500,000)
Compensation 32,000,000
227,000,000 227,000,000
*See the working below:
Trade
debtors 20,000,000
Less:
Good 500,000
Less:
Irrecoverable 9, 5000,000
10,000,000
80%
doubtful 8,000,000
20%
collectible 2,000,000
Hence
the total realizable = Tshs 2,500,000 (Good + Collectible)
From
the above illustration we can deduce the following important points:
a) What
the statement of affairs does effectively is to match the full amount of
unsecured creditors (amounting to Tsh. 165,000,000) with the amount expected to
be available to them (Tshs. 54,500,000) revealing the extent of anticipated
deficiency
b) Tshs.
14,000,00 expected from the damage vehicle is available exclusively to the
industrial bank, towards settlement of their capital plus interest, leaving
them to rank as unsecured creditors for the balance of Tshs. 42,000,000
c) Other
unsecured creditors include personal liability to Musoma Foods Ltd (Tsh.
16,000,000) contingent liability by way of compensation to employees 9Tshs.
32,000,000) and current liabilities of the business, other than those
qualifying for preferential treatment. The compensation is not accorded
preferential treatment because it had not accrued due before the date of the receiving order
d) The
amount expected to be produced by the disposal of both business and personal
property is available, firstly for discharging the preferential creditors
(Tshs. 19,000,000) leaving only the balance for unsecured creditors
e) While
the anticipated deficiency is being reported as Tshs. 110,500,000 all parties
will be fully aware that the actual deficiency finally crystallising is bound
to be different for several reasons such as:
(i)
There is no certainty
that the assets will produce amounts exactly as anticipated
(ii)
Part of the amounts on
the assets will be inevitably have to be used for paying costs and trustees
remuneration
(iii)
Trustee may be able to
bring in additional assets for realisation under the doctrine of relating back,
reputed ownership clause or by avoiding avoidable dispositions
Questions:
Define
the terms ‘statement of affairs’ and ‘Deficiency Account’. Identify the eleven
schedules supporting the statement of affairs
Question
2
Receiving
order was made on Musoma Stores; a retail owner on 1st March 2010.
The position of his business on that date was as follows:
Statement
of Financial Position as at 1st March, 2010
Tshs
ASSETS
Motor
vehicles 105,000,000
Stock
in trade 26,250,000
Trade
debtors 15,000,000
Cash
in hand 3, 750,000
TOTAL
ASSETS 150,000,000
EQUITY
AND LIABILITIES
Capital
78,750,000
Net
loss for the year (22,500,000)
Drawings
for the year (18,750,000)
Industrial
bank loan 37,500,000
Current
liabilities
75,000,000
TOTAL
EQUITY AND LIABILIES 150,000,000
It
has been ascertained that:
(a) The motor vehicle could be realized for
Tshs 10,500,000 while stock in trade may be realized at 10% more than the cost.
Tshs 375,000 of the debtors are expected to be good and Tshs 7,125,000 regarded
as irrecoverable, while 80% of the balance appears to be in doubt.
(b) Industrial Bank loan, on which interest
accrues at 9% per annum, is secured on the vehicle
(c) Current liabilities include 4,500,000
payable as interest on the Industrial Bank loan and Tshs 14,250,000 payable in
priority of others.
(d) Consequent to bankruptcy 24,000,000 would
become payable to the employees as compensation.
(e) Personal property of the bankrupt person
consists of a life policy valued at Tshs 18,750,000 Tshs 12,000,000 owing to
Chakula Supplies Ltd in respect of household provisions acquired for the family
Required:
Prepare
Statement of Affairs and Deficiency Account as at 1st March 2010.
Question
3
The
examination of the books of accounts submitted by Kareem who has filed a
petition for bankruptcy as at 31st December, 2011 revealed the
following trial balance:
Dr.Tshs
(‘000’)
|
Cr.Tshs
(‘000’)
|
||
Land
|
27,000
|
||
Plant and machinery
|
15,000
|
||
Mortgage (secured on land and
building
|
18,000
|
||
Stock at 1st January, 2010
|
12,000
|
||
Sales
|
111,000
|
||
Purchases
|
96,000
|
||
Wages
|
21,000
|
||
Debtors
|
18,000
|
||
Creditors
|
57,000
|
||
Bank
|
1,500
|
||
Capital
|
6,000
|
||
Drawings
|
4,500
|
||
193,500
|
193,500
|
Further
inquiries reveal that the stock at 30th April, 2010 is valued at
Tshs 9,000,000/=. The realizable value of other assets is:
Land
and buildings Tshs.
25,500,000/=
Plant
and machinery Tshs.
12,000,000/=
One
debt of Tshs. 1,500,000/= is irrecoverable. Of the creditors, Tshs 3,000,000/=
are preferential in bankruptcy. Personal drawings have not varied deficiency
account.
Required:
Prepare
a statement of affairs and deficiency account.