Question

Demote manufacturing Company Ltd. was adjudged bankrupt on a petition of its creditors, and the trustee in bankruptcy realized the following amounts from the sale of its business assets:

Cash in Bank	$14,000
Accounts Receivable	42,000
Inventories	20,000
Land & Buildings	72,000

The liabilities of the business were as follows at the time of the receiving order: (Assume all secured creditors had taken the necessary steps to protect their security.)

Rent owed to landlord (5 months @ $3,000 per month)	$15,000
Trade accounts payable	63,000
Municipal taxes payable (1.5 years)	4,000
Wages payable (2 months @ $2,500 per month - three employees)	15,000
Bank loan secured under section 427 (inventories secured)	35,000
First mortgage on land & buildings	50,000
Second mortgage on land & buildings	30,000

The expenses of liquidation were $7,000. The trustee’s fee was $5,000.

1. Show the order in which the trustee in bankruptcy made payments to the various types of creditors. Assume that all secured creditors had taken the necessary steps to protect their security.

2. Determine how many cents on the dollar the general creditors should receive?

Answer 1

1. Order of payment in case of liquidation :

a ) secured creditors : who are secured against the asset.

b ) unsecured creditors : suppliers and employees, govt.

C ) share holders.

Total Amount received by trustee :

Cash in hand = 14000$

Accounts Receivable = 42000$

Inventories = 20000$

Land and building = 72000$

Total = 148000$

Less amount paid :

Expenses on liquidation = 7000$

Liquidation expenses = 5000$

Balance available for settlement = 136000$

Secured creditors :

Bank loan = 20000$

( Secured against inventories )

Mortgage loan = 72000$

( First and second mortgage)

Unsecured creditors :

Rent to land lord ( 44000÷97000 )*15000 = 6804$

Trade accounts payable = 28577$

( 44000$÷97000$ )*63000$

Muncipal tax = 1814$

( 44000$÷97000$ )*4000$.

Wages payable

( 44000$÷97000$ )*15000$. = 6804$

2.the general creditor will receive

44000$÷136000$ = 32.35 cent/$ will be received by the general creditor.