Question

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 $317,000, 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 $2.5 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

Distribution of proceeds on liquidation:

Sl.No	Particulars	$ in thousands
1	Proceeds from sale of assets	2,500
2	First mortgage, paid from sale of assets
3	Fees and expenses of administration of bankruptcy	317
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	2,183

Distribution to general creditors:

Sl.No	Claims of general creditors	Application of 100% claim	Distribution	After subordination adjustment	% of original claims received
1	Notes payable	375,000	375,000	375,000	100%
2	Accounts payable	750,000	750,000	750,000	100%
3	Subordinated debentures	750,000	750,000	750,000	100%
4	Total	1,875,000	1,875,000	1,875,000

The remaining $ will go to the common stockholder = Available to general creditors - Distribution to general creditors = $2,183,000 - $1,875,000 = $308,000