Question

Liquidation

At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the following 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 $320,000, while the current assets were sold for another $230,000. Thus, the total proceeds from the liquidation sale were $550,000. The trustee's costs amounted to $30,000; no single worker was due more than the maximum allowable wages per worker; and there were no unfunded pension plan liabilities.

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 bonds*	300
			Second-mortgage bonds*	200
			Debentures	200
			Subordinated debentures**	100
			Common stock	50
			Retained earnings	-150
Total assets	$1,000		Total claims	$1,000
Notes: *All fixed assets are pledged as collateral to the mortgage bonds. **Subordinated to notes payable only.

A. How much will McDaniel's shareholders receive from the liquidation? Round your answer to the nearest dollar.
$ _____

B. How much will the mortgage bondholders receive? Round your answer to the nearest dollar.
$ _____

C. How much will other priority claimants receive from the liquidation? Round your answers to the nearest dollar. Do not round intermediate calculations.

Claimant	Amount
Trustee's expenses	$___
Workers' wages due	$___
Governments' taxes due	$___
Total	$___

D. How much will the remaining general creditors receive from the distribution before subordination adjustment? Round your answers to the nearest dollar. Do not round intermediate calculations.

Account	Amount Received
Accounts payable	$__
Notes payable	$__
Second mortgage bonds	$__
Debentures	$__
Subordinated debentures	$__
Total	$__

What is the effect of adjusting for subordination? Round your answers to the nearest dollar. Do not round intermediate calculations.

Account	Amount Received after subordination adjustment
Notes payable	$___
Subordinated debentures	$___

24-03

Answer 1

A ) calculation of amount the shareholders receive from liquidation

according to the liquidation process the earnings are distributed on the basis of priority

there is nothing left for the stakeholders therefore McDaniel s shareholders will receive

0 from the liquidation

B ) calculation of amount bondholders receive

the bond holders are the priority claimers from the liquidation so the amount received

after selling the fixed assets 320000 primarily separated among first and second bond holders

C ) calculation of amount priority claimants receive from liquidation

claimant	amount	working
trustee expenses	30000
workers wages due	30000
government taxes due	40000
total	100000	100000