Question

At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the following balance sheet shown below (in thousands of dollars). The court, after trying unsuccessfully to reorganize the firm, decided that the only recourse was liquidation under Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $410,000, while the current assets were sold for another $320,000. Thus, the total proceeds from the liquidation sale were $730,000. The trustee's costs amounted to $75,000; no single worker was due more than the maximum allowable wages per worker; and there were no unfunded pension plan liabilities.

Current assets	$  400		Account payable	$   50
Net fixed assets	600		Accrued taxes	40
			Accrued wages	30
			Notes payable	180
			Total current liabilities	$  300
			First-mortgage bonds*	300
			Second-mortgage bonds*	200
			Debentures	200
			Subordinated debentures**	100
			Common stock	50
			Retained earnings	-150
Total assets	$1,000		Total claims	$1,000
Notes: *All fixed assets are pledged as collateral to the mortgage bonds. **Subordinated to notes payable only.

How much will McDaniel's shareholders receive from the liquidation? Round your answer to the nearest dollar.
$

How much will the mortgage bondholders receive? Round your answer to the nearest dollar.
$

How much will other priority claimants receive from the liquidation? Round your answers to the nearest dollar. Do not round intermediate calculations.

Claimant	Amount
Trustee's expenses	$
Workers' wages due	$
Governments' taxes due	$
Total	$

How much will the remaining general creditors receive from the distribution before subordination adjustment? Round your answers to the nearest dollar. Do not round intermediate calculations.

Account	Amount Received
Accounts payable	$
Notes payable	$
Second mortgage bonds	$
Debentures	$
Subordinated debentures	$
Total	$

What is the effect of adjusting for subordination? Round your answers to the nearest dollar. Do not round intermediate calculations.

Account	Amount Received after subordination adjustment
Notes payable	$
Subordinated debentures	$

Answer 1

1. Total claims of Creditors total $1,100,000 and the trustee has an additional $75,000 in claims whereas the amount realized from sale of assets is only $730,000 .Therefore McDaniel's shareholders receive nothing from the liquidation?.

2. Amount of $410,000 realized from the sale of fixed assets must first be distributed to the first and second mortgage bondholders as these were pledged as collateral to the mortgage bondholders. The first mortgage holders receive their full claim of $300,000, while the second mortgage holders receive the remaining $110,000.

3. The priority claimants are the mortgage bondholders, trustee, workers, and government.  

Claimant   Amount

Trustee's expenses $ 50000

Workers' wages due $ 30000

Governments' taxes due $ 40000

Total $ 120000

4. Of the total $730,000 realised from saleof assets , $530,000 ( $120+ $300+$110) has been distributed to priority claimants. Thus the leftover $200,000 is to distributed among the unsecured creditors amounting to:

Account                                 Claim

                                 Accounts payable                       $ 50,000

                                 Notes payable                            180,000

                                 Second mortgage bonds 90,000

                                 Debentures                                 200,000

                                 Subordinated debentures           100,000

                                 Total                                          $620,000

Each claimant, before subordination adjustment, would receive $200,000/$620,000 X Claim Amount   

Account Amount Received

Accounts payable $ 16129

Notes payable $ 58065

Second mortgage bonds $ 29032 (Plus 90000)

Debentures $ 64516

Subordinated debentures $ 32258

Total $ 1730000

The subordinated debentures are subordinate to notes payable. Therefore, the subordinate debenture holders must surrender all claims until the note payable holders are fully satisfied.

Amount received after Subordination adjustment

Notes payable = 58065+ 32258 = $90323

Subordinated debentures Nil