Question

eBook Problem Walk-Through Problem 24-01 Liquidation Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Fixed assets 1,875,000 Notes payable 750,000 Subordinated debentures 750,000 Total debt $1,875,000 Common equity 1,875,000 Total assets $3,750,000 Total liabilities and equity $3,750,000 The trustee's costs total $283,750, and the firm has no accrued taxes or wages. Southwestern has no unfunded pension liabilities. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $4 million is received from sale of the assets? Distribution of proceeds on liquidation: 1. Proceeds from sale of assets $ 2. First mortgage, paid from sale of assets $ 3. Fees and expenses of administration of bankruptcy $ 4. Wages due workers earned within 3 months prior to filing of bankruptcy petition $ 5. Taxes $ 6. Unfunded pension liabilities $ 7. Available to general creditors $ Distribution to general creditors: Claims of General Creditors Claim (1) Application of 100% Distribution (2) After Subordination Adjustment (3) Percentage of Original Claims Received (4) Notes payable $ $ $ % Accounts payable $ $ $ % Subordinated debentures $ $ $ % Total $ $ $ The remaining $ will go to the common stockholders.

Answer 1

If the company receives a total of $4 million from sale of the assets = 40,00,000

As per the facts of the question (COPIED FROM THE QUESTION)

Distribution of proceeds on liquidation:

1. Proceeds from sale of assets	$ 40,00,000
2. First mortgage, paid from sale of assets	NIL
3. Fees and expenses of administration of bankruptcy	2,83,750
4. Wages due workers earned within 3 months prior to filing of bankruptcy petition	NIL
5. Taxes	NIL
6. Unfunded pension liabilities	NIL
7. Available to general creditors	37,16,250

Distribution to general creditors:

Claims of General Creditors	Claim (1)	Application of 100% Distribution (2)	After Subordination Adjustment (3)	Percentage of Original Claims Received (4)
Notes payable	$7,50,000	$7,50,000		%100
Accounts payable	$3,75,000	$3,75,000		%100
Subordinated debentures	$7,50,000	$7,50,000		%100
Total	$18,75,000	$ 18,75,000

since the company has sufficient amount to pay to all its creditors the company need not to alter payment to any one.

The remaining amount after payment of claims to the creditors shall be paid to the common stockholders

=$ 37,16,250 - 18,75,000

= $ 18,41,250