Kelly Mills Ltd Was Wound Up On 22nd August 2020 ✓ Solved

Kelly Mills Ltd was wound up on 22nd August 2020. Kelly Mill

Kelly Mills Ltd was wound up on 22nd August 2020. Kelly Mills Ltd Trial Balance as at 22nd August 2020 Debit Credit Cash $46 800 Inventories Plant and equipment Land and buildings Accumulated losses Accounts payable Alliance Bank mortgage loan (secured on land and buildings) Share capital: ordinary shares issued for $1 each, fully paid. The following information is relevant (a) The assets were sold and realised the following cash amounts: Inventories $ Plant and machinery $ (b) The Alliance Bank took possession of the land and buildings, sold them for $ and after the debt was cleared paid any excess funds to the liquidator. (c) Liquidation costs were $98 800. (d) The liquidator paid all liabilities. Required Prepare the JOURNAL ENTRIES to wind up the affairs of Kelly Mills Ltd and to calculate any deficiency and distribution to the shareholders. T accounts are NOT required.

Paper For Above Instructions

Overview and note on missing data

The cleaned assignment asks for the journal entries to record the winding up of Kelly Mills Ltd (wound up 22 August 2020) and to calculate any deficiency or distribution to shareholders. The trial balance and realisation receipts are referenced but several numeric amounts (carrying amounts for inventories, plant, land & buildings; amounts realised on sale; the mortgage balance; accounts payable; and share capital) are not provided in the assignment text. To prepare authoritative journal entries and a numeric distribution calculation, those amounts are required. In the absence of the missing numeric data this solution provides:

• a complete, standard template of journal entries to be made during a voluntary liquidation (with explanations);
• a clear worked illustration using explicitly stated assumptions and assumed numeric values so you can see how to compute deficiency or distribution; and
• a short checklist of inputs to replace assumptions with the actual figures from the company records so the same journal entries and calculation can be completed with real data.

General journal-entry template for winding up (explanatory)

Use the following entry templates and adapt amounts to the company’s actual carrying values and realised proceeds. Where an asset sells for less than carrying amount, record a loss on realisation; where more, record a gain. Accumulated depreciation should be removed when shown separately; where the trial balance shows net book value only, remove the asset at that net carrying amount.

1. Realisation of inventories

   When inventories are sold for cash:

   Dr Cash (cash received from sale)

   Dr Loss on Realisation of Inventories (if cash < carrying amount) OR Cr Gain on Realisation (if cash > carrying amount)

   Cr Inventories (carrying amount)

2. Realisation of plant & equipment

   When plant is sold:

   Dr Cash (cash received)

   Dr Loss on Realisation of Plant (if required) OR Cr Gain on Realisation

   Cr Plant and Equipment (carrying amount)

3. Secured creditor (Alliance Bank) and land & buildings

   If the secured creditor takes possession and sells the property directly, the liquidator records any cash received from the bank (excess after debt clearance). If the bank returns surplus:

   Dr Cash (excess proceeds returned by bank)

   Cr Bank Mortgage Loan (to the extent the bank had recorded the debt in the trial balance and it is now extinguished)

   If sale proceeds were insufficient and the bank retains a shortfall, the bank normally presents an unsecured claim for the shortfall – treat as Accounts Payable / unsecured creditor.

4. Record liquidation expenses (liquidator’s fees, costs)

   When liquidation costs are paid or accrued (example given: $98,800):

   Dr Liquidation Expenses (or Realisation Expenses) $98,800

   Cr Cash $98,800 (when paid) or Cr Accrued Liabilities (when accrued)

5. Payment of liabilities

   Close and pay unsecured liabilities in order of priority:

   Dr Accounts Payable (full book balance)

   Cr Cash (amount paid)

6. Close realisation profit or loss to equity (accumulated losses / retained earnings / capital)

   If a Realisation Account is used, transfer its balance to Accumulated Losses (or Retained Earnings/share capital), for example:

   Dr Realisation Account (if loss) / Cr Realisation Account (if gain)

   Cr Accumulated Losses (or Cr Gain on Realisation to Retained Earnings), as applicable

7. Distribution of remaining cash to shareholders

   When the liquidator pays final dividends to shareholders:

   Dr Share Capital (or Retained Earnings / Shareholders' Equity accounts being reduced)

   Cr Cash (amount paid to shareholders)

   If there is a deficiency (no cash remaining), shareholders receive nothing and the capital accounts are written off.

Illustrative worked example (assumptions)

To show how the template is applied, assume the missing figures as follows (these are assumptions only — replace with the company’s actual figures):

• Inventories (carrying amount): $120,000. Realised cash: $90,000.
• Plant & equipment (carrying amount net of accumulated depreciation): $350,000. Realised cash: $260,000.
• Land & buildings (book value): $500,000. Bank mortgage outstanding: $420,000. Bank sold property for $460,000 and returned excess $40,000 to liquidator.
• Accounts payable (unsecured creditors): $80,000.
• Share capital: 500,000 ordinary shares issued and fully paid ($1 each) = $500,000.
• Accumulated losses (opening retained deficit): $200,000 (debit).
• Cash at hand at commencement: $46,800. Liquidation costs: $98,800 (as given).

Step-by-step numeric journal entries (with assumptions)

1. Realise inventories:

Dr Cash $90,000

Dr Loss on Realisation of Inventories $30,000

Cr Inventories $120,000

2. Realise plant & equipment:

Dr Cash $260,000

Dr Loss on Realisation of Plant $90,000

Cr Plant & Equipment $350,000

3. Bank sells land & buildings and returns excess to liquidator:

Bank extinguishes mortgage from sale proceeds (bank entry outside company records). On receipt of excess from bank:

Dr Cash $40,000

Cr Alliance Bank Mortgage Loan $40,000 (to reflect extinguishment to extent of amount returned). If the mortgage balance remains recorded in company ledgers, reduce it by the amount bank cleared.

4. Record and pay liquidation costs:

Dr Liquidation Expenses $98,800

Cr Cash $98,800

5. Pay unsecured creditors:

Dr Accounts Payable $80,000

Cr Cash $80,000

6. Transfer losses on realisation to accumulated losses (aggregate losses):

Total losses on realisation = $30,000 + $90,000 = $120,000.

Dr Accumulated Losses (or Retained Earnings) $120,000

Cr Loss on Realisation (close to equity) $120,000

7. Distribute residual cash to shareholders or determine deficiency:

Compute cash available after all receipts and payments:

Receipts: opening cash $46,800 + inventories $90,000 + plant $260,000 + bank excess $40,000 = $436,800.

Payments: liquidation costs $98,800 + pay creditors $80,000 = $178,800.

Cash available for shareholders = $436,800 - $178,800 = $258,000.

Equity position before distribution: Share capital $500,000 less accumulated losses opening $200,000 less additional realisation losses $120,000 = Net equity = $180,000 (deficit or surplus depends on signs). Under these assumptions net equity = 500,000 - 200,000 - 120,000 = $180,000 net credit to shareholders.

Because cash available ($258,000) > net equity ($180,000), shareholders can be paid the net equity balance; the liquidator pays $180,000 to shareholders, and any remaining cash is treated per liquidation rules (normally returned or retained — in practice, the cash available equals the equity to be distributed). For this illustration assume the liquidator distributes $180,000:

Dr Share Capital $180,000 (or Dr Retained Earnings/Shareholders' Equity appropriate accounts)

Cr Cash $180,000

Net result: shareholders receive $180,000 under these assumptions. If, in actual figures, cash available were less than net equity, shareholders would receive a pro rata lesser distribution and the balance of share capital would be written off (no call on fully paid ordinary shareholders).

Checklist of actual inputs required

Replace the assumed numbers with the company’s actual:

• Carrying amounts of inventories, plant & equipment, land & buildings;
• Actual cash realised from each asset sale;
• Actual mortgage balance and bank sale proceeds;
• Opening cash balance and recorded accounts payable;
• Number and value of ordinary shares (share capital) and accumulated losses;
• Liquidator’s fees and other realisation expenses.

Practical and reporting notes

All liquidation journal entries should be supported by sale invoices, bank statements, and the liquidator’s fee schedule. The sequence above follows standard practice for realisation accounting and distribution in insolvency (ACCA; ICAEW guidance) and should be adapted to the jurisdictional rules (Companies Act or Corporations Act) governing priority of payments and treatment of secured creditors (ACCA 2016; ICAEW 2015).

References

• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting. Wiley. (See chapters on disposal of assets and closing entries.)
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting. Wiley.
• ACCA. (2016). Liquidation and insolvency accounting guidance. Association of Chartered Certified Accountants.
• ICAEW. (2015). Liquidation and insolvency: Practical guide for accountants. Institute of Chartered Accountants in England and Wales.
• Insolvency Service (UK). (2020). A guide to insolvency procedures and priorities.
• Australian Securities & Investments Commission (ASIC). (2020). Liquidation: A guide for stakeholders.
• Companies Act 2006 (UK). (2006). Legislation and rules on company winding up and creditor priority.
• International Accounting Standards Board. IAS 1 Presentation of Financial Statements (re: closing equity balances).
• PWC. (2018). Accounting for restructuring and insolvency: practical considerations. PricewaterhouseCoopers.
• Deloitte. (2019). Corporate insolvency: accounting and reporting issues. Deloitte Insights.