Question

4.   A firm’s balance sheet is given below. Liquidation bankruptcy has been initiated, and the cost of administering the bankruptcy proceedings is $50,000. The mortgage bonds were secured by the equipment, and the equipment sold for $350,000. All other assets sold for $308,000. Distribute the $658,000 in asset liquidation proceeds.

Current Assets       $   60,000 Accounts Payable       $ 120,000

Equipment             100,000 Wages Payable         150,000   

Plant & Property         840,000 Taxes Payable         140,000

Mortgage Bonds         300,000

Preferred Stock          50,000

Common Stock         150,000

Retained Earnings 90,000

Total               $1,000,000 Total               $1,000,000

Answer 1

In the asset liquidation process, the assets are distributed on the basis of priority of claims. The first in line is the liquidator's fees for administering the bankruptcy proceedings which is $50,000. Amount remaining is $608,000. The second in line are the secured creditors. Here mortgage bonds have been secured by equipment which has fetched $350,000. Therefore mortgage bondholders are being paid off $300,000. Amount remaining is $308,000. Next in line are the unsecured creditors. They will be paid off proportionately on the basis of amount due. They will be paid as follows:

Accounts payable: 120,000/410,000 x 308,000 = $90,146

Wages payable: 150,000/410,000 x 308,000 = $112,683

Taxes payable: 140,000/410,000 x 308,000 = $105,171

The remaining amount which has fallen short will have to be written off by them as bad debts or irrecoverable debts.