Question

Liquidation

At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the balance sheet shown below (in thousands of dollars). The court, after trying unsuccessfully to reorganize the firm, decided that the only recourse was liquidation under Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $430,000, while the current assets were sold for another $240,000. Thus, the total proceeds from the liquidation sale were $670,000. The trustee's costs amounted to $50,000; no single worker was due more than the maximum allowable wages per worker; and there were no unfunded pension plan liabilities.

Balance Sheet (Thousands of Dollars)
Current assets	$	400		Account payable	$	50
Net fixed assets		600		Accrued taxes		40
				Accrued wages		30
				Notes payable		180
				Total current liabilities	$	300
				First-mortgage bondsa		300
				Second-mortgage bondsa		200
				Debentures		200
				Subordinated debenturesb		100
				Common stock		50
				Retained earnings		(150)
Total assets	$	1,000		Total liabilities & equity	$	1,000
Notes: aAll fixed assets are pledged as collateral to the mortgage bonds. bSubordinated to notes payable only.

1. How much will the first mortgage bondholders receive from collateralized assets? Will they receive their full claim? If not, how much is their remaining claim? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar. If no entry is required, enter "0".

   The first mortgage bondholders will receive $   from collateralized assets that -Select-isis notItem 3 equal to their full claim. Therefore, the first mortgage holders have $   in unsatisfied claims.

2. How much will the second mortgage bondholders receive from collateralized assets? Will they receive their full claim? If not, how much is their remaining claim? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar. If no entry is required, enter "0".

   The second mortgage bondholders will receive $   from collateralized assets that -Select-isis notItem 6 equal to their full claim. Therefore, the second mortgage holders have $   in unsatisfied claims.

3. How much will the other priority claimants (in addition to the mortgage bondholders) receive from the liquidation? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar.

   Remainging primary claimants	Amount
   Trustee's expenses	$
   Workers' wages due	$
   Governments' taxes due	$
   Total	$

4. How much will the remaining general creditors receive from the distribution before subordination adjustment? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar.

   Account	Amount Received before subordination adjustment
   Accounts payable		$
   Notes payable		$
   Second mortgage bonds		$
   Debentures		$
   Subordinated debentures		$
   Total		$

   How much will the remaining general creditors receive after subordination? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar. If no entry is required, enter "0".

   Account	Amount Received after subordination adjustment
   Accounts payable		$
   Notes payable		$
   Second mortgage bonds		$
   Debentures		$
   Subordinated debentures		$
   Total		$

   How much in total will the second mortgage holders receive (include the amount received from collateral)? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answer to the nearest dollar.

   $  

Answer 1

Q1. 1st mortgage bondholders are paid in full as they are secured by the colleteral, hence they are fully paid and receive an amount of $ 300,000 in full.

Selling if Fixed and current assets	670,000
1st mortgage bondholders	(300,000)
	370,000
Trustee wages	(50,000)
Accurred taxes	(40,000)
Accured wages	(30,000)
Total		(120,000)
		250,000
Accounts payable	(17,123)

Notes payable	(61,643)
2nd mortgage bonds	(68,494)
Debenture	(68,494)
Subordinated debentures	(34,246)
	(250,000)
Total	0

Ratio of Accounts payable: Notes payable:2nd mortgage bonds:Debenture:Subordinated debentures

= 5: 18 : 20 :20: 10

Other priority climant - $370,000

For remaining general creditor - $ 250,000

2nd mortgage bond holder - $ 68,494