Question

The Walston Company is to be liquidated and has the following liabilities:

Income taxes	$	9,600
Notes payable (secured by land)		156,000
Accounts payable		103,000
Salaries payable (evenly divided between two employees)		24,000
Bonds payable		88,000
Administrative expenses for liquidation		38,000

The company has the following assets:

	Book Value				Fair Value
Current assets	$	98,000			$	53,000
Land		118,000				108,000
Buildings and equipment		118,000				162,000

How much money will the holders of the notes payable collect following liquidation?

Answer 1

Payment on notes payable:
Value of security (land)	108,000
60% of remaining 48,000	28,800
Total collected by holders	136,800
Working
Free assets
Current assets	53,000
Buildings and equipment	162,000
Total	215,000
Liabilities with priority:
Administrative expenses	38,000
Salaries payable	24,000
(only $12,000 per employee)
Income taxes	9,600
Total	71,600
Free assets after payment of liabilities with priority		143,400
(215,000 - 71,600)
Unsecured liabilities:
Notes payable (in excess of value of security)	48,000
Accounts payable	103,000
Bonds payable	88,000
Total	239,000
Percentage of unsecured liabilities to be paid	60.00%
(143,400/239,000)