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 $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 $75,000; 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.

1. 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	$

2. 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	$

Answer 1

Given that all fixed assets are pledged as collateral to the mortgage bonds and the remaining priority claimants will be:
Claimant                                                         Amount
Trustee's expenses                                     $ 75,000
Workers' wages due                                     30,000
Governments' taxes due                              40,000
Total                                                             $145,000
That means from the total amount received from the liquidation = $670,000
Less: distributed to priority claimants ($430,000+145,000) = (575,000)
The balance amount can distribute to the general creditors = $95,000
Here, we can see the general creditor claims total:
Account                                                        Claim
Accounts payable                                    $ 50,000
Notes payable                                           180,000
Second mortgage bonds
(unsatisfied claim of $100,000 ) 100,000
Debentures                                               200,000
Subordinated debentures                      100,000
Total                                          $630,000

Thus, each claimant, before subordination adjustment, would receive $95,000/$630,000 = 0.150794 of his or her claim.
Therefore, the general creditors would receive:
Account                                                                                                                 Amount Received
Accounts payable(50,000*0.150794)                                                                     $ 7,539.68
Notes payable (180,000*0.150794)                                                                           27,142.86
Second mortgage bonds                                                                                        15,079.37 (plus $100,000)
Debentures                                                                                                           30,158.73
Subordinated debentures                                                                                  15,079.37
Total                                                                                                                       $ 95,000

2. Finally, the after subordination adjustment:
  

Account	Amount Received after subordination adjustment
Notes payable (subordinate debenture holders must relinquish all claims until the note payable holders are fully satisfied. Thus, the note payable holders are = $180,000 - $27,142.86 = $152,857.14 will be short. Therefore, total amount allocated to notes payable will be = $27,142.86+ 15,079.37)	$ 42,222.22
Subordinated debentures	$nil

12Q.