Liquidation

Question 1

What is liquidation or winding up?

Answer 1

Process of dealing with or administering a company’s affairs prior to its dissolution by ascertaining the assets, realizing and applying them, firstly, in the payment of creditors and thereafter by distribution of the residue among the shareholders of the company

Question 2

What are the steps in answering a liquidation question?

Answer 2

1. Calculate the purchase price and the number of shares to be issued for buying the company
   Total assets - total liabilities = total purchase price
   Total purchase price - cash portion = purchase price to be settle in shares
   Purchase price in shares / market share price = number if shares to be issued
2. Do ledger account
   - open liquidation account
   - open ordinary shareholders account with balance
   - open preference shareholder account with balance
   - open liquidator account
   - transfer all assets, reserves and liabilities to the liquidation account
   - debit the liquidator account with the purchase price and credit the liquidation account
   - debit the preference shareholders account with the amount to be paid to them and credit the liquidator account
   - close the liquidator account by working out the balance to be settled to the ordinary shareholders, debit the ordinary Shareholders account with this amount.
   - close the ordinary shareholders account by working out the balancing figure to be debited in the liquidation account
   - close the preference shareholders account by working out the balancing figure to be debited in the liquidation account
   - close off the liquidation account, the debit side should equal to the credit side.