Question

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 & equity	$3,750,000

The trustee's costs total $234,750, 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 $2.5 million is received from sale of the assets? Round your answers for monetary values to the nearest dollar and for percentage values to the nearest whole number. If your answer is zero, enter “0”. Enter your answers as positive values.

Distribution of proceeds on liquidation:

Proceeds from the sale of assets	$
Less:
1. First mortgage (paid from the sale of fixed assets)
2. Fees and expenses of bankruptcy
3. Wages due to workers within 3 months of bankruptcy
4. Taxes due to federal, state, and local governments
5. Unfunded pension liabilities
Funds available for distribution to general creditors	$

Distribution to general creditors:

General Creditors' Claims (1)	Amount of Claim (2)	Application of 100% Distribution (3)	Distribution after Subordination Adjustment (4)	Percentage of Original Claim Received (5)
Accounts payable	$	$	$	%
Notes payable
Subordinated debentures
Total	$	$	$

Round your answer for monetary value to the nearest dollar and for percentage value to two decimal places.

The remaining $   will go to the common stockholders. They will receive only   % of the amount of equity on the balance sheet.

Answer 1

If the firm goes the into the liquidation & Bankrupt, a trustee will be appointed to realize and oversee the proceedings of the liquidation. The realization amount will be paid to the trustee first as a commission to him for the work done. The remaining amount will be discharged on the basis of preference among the creditors after payment of all statutory and preferred liabilities.

Statement of the amount available for distribution:

Particulars	Amount($)
Proceeds from the sale of assets	2,500,000
Less:
1. First mortgage (paid from the sale of fixed assets)	0
2. Fees and expenses of bankruptcy	234,750
3. Wages due to workers within 3 months of bankruptcy	0
4. Taxes due to federal, state, and local governments	0
5. Unfunded pension liabilities	0
Funds available for distribution to general creditors	2,265,250

Statement of the amount available to the general creditors:

General Creditors' Claims (1)	Amount of Claim (2)	Application of 100% Distribution (3)	Distribution after Subordination Adjustment (4)	Percentage of Original Claim Received (5)
Accounts payable	$ 375,000	$ 375,000	$ 1,890,250	100%
Notes payable	$ 750,000	$ 750,000	$ 1,140,250	100%
Subordinated debentures	$ 750,000	$ 750,000	$ 390,250	100%
Total	$ 1,875,000	$ 1,875,000

From the results of the above table, we found that the amount available for common equity shareholders is $390,250.

They will receive 20.81%($390,250/$1,875,000) amount of equity on the balance sheet.