Question

At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the balance sheet shown here (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 Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202 Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 24 Bankruptcy, Reorganization, and Liquidation 957 the mortgage bondholders, brought in $400,000, while the current assets were sold for another $200,000. Thus, the total proceeds from the liquidation sale were $600,000. 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 Accounts payable $   50 Net fixed assets 600 Accrued taxes 40 Accrued wages 30 Notes payable 180 Total current liabilities $ 300 First-mortgage bonds a 300 Second-mortgage bonds a 200 Debentures 200 Subordinated debentures b 100 Common stock 50 Retained earnings (150) Total assets $1,000 Total liabilities & equity $1,000 Notes: a All fixed assets are pledged as collateral to the mortgage bonds. b Subordinated to notes payable only. a. How much will McDaniel’s shareholders receive from the liquidation? b. 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? c. 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? d. Who are the other priority claimants (in addition to the mortgage bondholders)? How much will they receive from the liquidation? e. Who are the remaining general creditors? How much will each receive from the distribution before subordination adjustment? How much will each receive after subordination? How much in total will the second mortgage holders receive (include the amount received from collateral)

Answer 1

(a.)

Particulars	Amount ( Thousand of $ )	Amount ( Thousand of $ )
Accounts Payable	$ 50
Accrued Taxes	$ 40
Accrued Wages	$ 30
Notes Payable	$ 180
Total Current Liabilties		$ 300
First mortgage bonds		$ 300
Second Mortgage bonds		$ 200
Debentures		$ 200
Subordinated Debentures		$ 100
Total creditors Claims		$ 1,100

Total Claims of Creditors = $1,100,000

Trustee's cost (additional claim) = $50,000

Total claims = Creditors claim + Trustee's claim

= $1,100,000 + $50,000 = $1,150,000

Total Proceeds from liquidation sale = mortgage bond holder brought + Sale of current assets

= $400,000 + $200,000

= $600,000

Since proceeds are insufficient to settle the claims of creditors and trustee i.e., total claims. The McDaniel’s shareholders receive nothing from the liquidation.

(b.) Fixed Assets are mortgaged or pledged as collateral asset against mortgage bonds. So, the proceeds from the sale of fixed assets should be distributed to mortgage bondholders.

First Mortgage Bonds' claim = $300,000

Proceeds from sale of fixed assets, which were pledged as collateral to the mortgage bondholders = $400,000 ( the mortgage bondholders, brought in )

Firstly, First motgage bonds' holder receive claim = $300,000

First motgage bonds' holder receive their full claim.

(c.) After first mortgage bonds' claim balance amount = $400,000 - $300,000

= $100,000

Hence, Second motgage bonds' holder receive claim = $100,000

Balance amount of claim of $100,000 ( $200,000 - $100,000 ) , which is unsatisfied will be consider as general claim.

Total Amount recieved by Second Motgage Bondholders = $100,000 + $12,700 (as general claim, working in last part)

= $112,700

(d.)

Other Priority Claimants receives from the liquidation.

Claimants	Amount
Trustees' Expenses	$50,000
Workers' Wages Due	$30,000
Government Taxes Due	$40,000
Total	$120,000

(e.)

Amount available for General Creditor's Claim

Amount Recieve from the liquidation	$600,000
Less : Mortgage bondholders	($400,000)
Less : Total Claimants	($120,000)
Amount available for distribution to General Creditors	$80,000

Total amount need for general claims :

Particulars	Amount
Accounts Payable	$50,000
Add : Notes Payable	$180,000
Add : Second mortgage bonds (general)	$100,000
Add : Debentures	$200,000
Add : Subordinated debentures	$100,000
Total	$630,000

Amount received by general creditors before subordinate adjustment :

Particulars	Amount (A)	Amount distributed = [ A * ( 80,000 / 630,000 )	Amount Round off
Accounts Payable	$50,000	50,000 * ( 80,000 / 630,000 ) = $6,349	$6,350
Add : Notes Payable	$180,000	180,000 * ( 80,000 / 630,000 ) = $22,857	$22,860
Add : Second mortgage bonds (general)	$100,000	100,000 * ( 80,000 / 630,000 ) = $12,698	$12,700
Add : Debentures	$200,000	200,000 * ( 80,000 / 630,000 ) = $25,397	$25,400
Add : Subordinated debentures	$100,000	100,000 * ( 80,000 / 630,000 ) = $12,698	$12,700
Total	$630,000	$80,000

Amount received by general creditor after subordinate adjustment :

Particulars	Amount ($)
Accounts payable	$6,350
Notes payable	$35,560	$22,860 + $12,700
Second mortgage bonds	$12,700
Debentures	$25,400
Subordinated debentures	0

Total Amount recieved by Second Motgage Bondholders = $100,000 + $12,700

= $112,700