Question

11

consider the following information for Evans, Inc. when the company entered bankruptcy proceedings:

Account	Balance per Books Dr (Cr)
Cash	$31,700
Accounts receivable	646,800
Inventory	320,000
Prepaid expenses	10,600
Buildings, net	750,000
Equipment, net	123,500
Goodwill	88,000
Wages payable	(77,300)
Taxes payable	(30,900)
Accounts payable	(967,300)
Notes payable	(205,400)
Common stock	(1,200,000)
Retained earnings—deficit	510,300
Total	$0

Inventory with a book value of $240,000 and realizable value of $175,000 is security for notes payable of $145,000. The equipment secures the remaining notes payable. Expected realizable values of the assets are:

Accounts receivable	$300,000
Inventory	200,000
Buildings	250,000
Equipment	40,000

The prepaid expenses and goodwill have a realizable value of zero. The entire wages payable balance is a priority liability.

Required

Compute the estimated deficiency to unsecured creditors.

Do not use negative signs with any of your answers below.

Assets pledged to fully-secured creditors	$Answer
Less: Liabilities to fully-secured creditors	Answer
Available as free assets	Answer
Unpledged assets	Answer
Less: Unsecured liabilities with priority	Answer
Net free assets	$Answer
Liabilities to partially-secured creditors	$Answer
Less: Assets pledged to partially-secured creditors	Answer
Unsecured portion	Answer
Unsecured liabilities	Answer
Total unsecured liabilities	$Answer
Estimated deficiency to unsecured creditors	$Answer

Answer 1

The estimated deficiency to unsecured creditors is calculated as difference between net free assets and unsecured liabilities
Statement of estimated deficiency to unsecured creditors
Assets pledged to fully-secured creditors
Inventory	$175,000
Less: Liabilities to fully-secured creditors
Notes payable	$145,000
Available as free assets		$30,000
Unpledged assets
Cash	$31,700
Accounts receivable	$300,000
Inventory (200000-175000)	$25,000
Buildings	$250,000	$606,700
Total free assets			$636,700
Less: Unsecured liabilities with priority
Wages payable	$77,300
Taxes payable	$30,900		-$108,200
Net free assets			$528,500
Liabilities to partially-secured creditors
Notes payable (205400-145000)	$60,400
Less: Assets pledged to partially-secured creditors	-$40,000
Unsecured portion			$20,400
Unsecured liabilities			$967,300
Total unsecured liabilities			$987,700
Estimated deficiency (987700-528500)			$459,200