Question

HOW MUCH IS AVAILABLE TO PAY GENERAL CREDITS?

Bankruptcy problem

                 Assets                                                                Liabilities and Equity

Cash                                              $40,000          Accounts payable                       $200,000

Accounts receivable                    200,000         Accrued wages                                 50,000     

                                                                        Secured bank loan                        150,000

                                                                          Unsecured bank loan                   250,000

Inventory                                   400,000         Mortgage                                        300,000

Plant and equipment                  360,000         Subordinated debentures              60,000

                                                                    Junior subordinated debentures        40,000

                                                                    Common stock                               50,000

                                                                      Retained earnings                       (100,000)

The firm defaults and the only solution is a liquidate, so the question becomes how much each claimant receive.

A buyer is found for the receivable for $0.70 per $1.00.

The inventory, which secures the bank loan, can be sold for $0.50 on the $1.00.

The plant and equipment, which secures the mortgage, are sold for $250,000.

The payables are equally subordinated to both bank loans.

The subordinated debentures are subordinated to the mortgage.

The junior subordinated debentures are subordinated to the subordinated debentures.

Court costs, pension costs have previously been covered.

How much is available to pay general credits?

Answer 1

The amount realised in the liquidation to paid as per following sequence:

* Liquidation cost

* Worker wages

* Employee salary

* Secured loans

* crediors or accounts payable

*Borrowing or debenture

* Equity shares

The general credit is the credit amount which is not secured on the particular assets.

The amount available to pay general credits is as follows:

Resultant table:

The amount available to pay general credit is $180,000.