Question

Liquidation

At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the 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 $330,000, while the current assets were sold for another $220,000. Thus, the total proceeds from the liquidation sale were $550,000. The trustee's costs amounted to $30,000; no single worker was due more than the maximum allowable wages per worker; and there were no unfunded pension plan liabilities.

Balance Sheet (Thousands of Dollars)
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 bondsa		300
				Second-mortgage bondsa		200
				Debentures		200
				Subordinated debenturesb		100
				Common stock		50
				Retained earnings		(150)
Total assets	$	1,000		Total liabilities & equity	$	1,000
Notes: aAll fixed assets are pledged as collateral to the mortgage bonds. bSubordinated to notes payable only.

1. How much will McDaniel's shareholders receive from the liquidation? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answer to the nearest dollar. If no entry is required, enter "0".

   $  

2. How much will the first mortgage bondholders receive from collateralized assets? Will they receive their full claim? If not, how much is their remaining claim? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar. If no entry is required, enter "0".

   The first mortgage bondholders will receive $   from collateralized assets that -Select-isis notItem 3 equal to their full claim. Therefore, the first mortgage holders have $   in unsatisfied claims.

3. How much will the second mortgage bondholders receive from collateralized assets? Will they receive their full claim? If not, how much is their remaining claim? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar. If no entry is required, enter "0".

   The second mortgage bondholders will receive $   from collateralized assets that -Select-isis notItem 6 equal to their full claim. Therefore, the second mortgage holders have $   in unsatisfied claims.

4. How much will the other priority claimants (in addition to the mortgage bondholders) receive from the liquidation? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar.

   Remainging primary claimants	Amount
   Trustee's expenses	$
   Workers' wages due	$
   Governments' taxes due	$
   Total	$

5. How much will the remaining general creditors receive from the distribution before subordination adjustment? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar.

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

   How much will the remaining general creditors receive after subordination? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar. If no entry is required, enter "0".

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

   How much in total will the second mortgage holders receive (include the amount received from collateral)? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answer to the nearest dollar.

   $  

Answer 1

a. $0

b. 300,000 , is equal to their claim

c. 30,000 , that is less than equal to their full claim. They have $170,000 in unsatisfied claims

d.

Trustee's expenses	30,000
Workers' wages due	30,000
Governments' taxes due	40,000
Total	100,000

e.

Accounts payable	8571
Notes payable	30857
Second mortgage bonds	29143
Debentures	34286
Subordinated debentures	17143
Total	120000

Workings:

Balance left to other liabilities = (220000-100000)/700000 = 17.14%
		17.143%
Allocation
Accounts payable	50000	17.14%	8571
Notes payable	180000	17.14%	30857
Second mortgage bonds	170000	17.14%	29143
Debentures	200000	17.14%	34286
Subordinated debentures	100000	17.14%	17143
Total	700000