Question

Problem 24-03
Liquidation

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 $310,000, while the current assets were sold for another $320,000. Thus, the total proceeds from the liquidation sale were $630,000. The trustee's costs amounted to $40,000; 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.

1. How much will McDaniel's shareholders receive from the liquidation? Round your answer to the nearest dollar.
   $
   
2. How much will the mortgage bondholders receive? Round your answer to the nearest dollar.
   $
   
3. 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	$

   
   
4. 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

a. The proceeds are insufficient to satisfy the creditors and trustee claims, thus the shareholders will receive nothing

Claim for creditors:
Account payable	50
Accrued taxes	40
Accrued wages	30
Notes payable	180
First-mortgage bonds*	300
Second-mortgage bonds*	200
Debentures	200
Subordinated debentures**	100
Total	1100
Proceeds from liquidation	600
Trustee costs	-50
Cash to be distributed	550

b.

Distribution to first mortgage (paid from sale of fixed assets)	300000
Distribution to second mortgage (paid from sale of fixed assets after satisfying first mortgage holders)	10000
Total preliminary distributions to priority claimaints	310000

The first mortgage holders will receive full  claim  of  $300,000,  while  the  second  mortgage  holders  receive  the  remaining $10,000.  This constitutes the total $310,000, so none of the proceeds from the sale of pledged assets  are available for distribution to general creditors.  Additionally, the second mortgage holders have $190,000 in unsatisfied claims which become general creditor claims.

c.

Claimant	Amount
Trustee's expenses	65000
Workers' wages due	30000
Governments' taxes due	40000
Total	135000

d. Of the total $660,000 received from the liquidation,($3,10,000 + $135,000)  $445,000 has been distributed to priority claimants.  This leaves $215,000 to distribute to the general creditors.  But the general creditor claims total $630,000.

Account	Amount Claim
Accounts payable	50000
Notes payable	180000
Second mortgage bonds	190000
Debentures	200000
Subordinated debentures	100000
Total	720000

The  second  mortgage  holders'  unsatisfied  claim  of  $190,000  is  included.  Each  claimant,  before  subordination  adjustment, would  receive  $190,000/$720,000  = 0.26.39 of his or her claim.

Account	Amount Received
Accounts payable	13194.44
Notes payable	47500
Second mortgage bonds	50138.89
Debentures	52777.78
Subordinated debentures	26388.89
Total	190000

effect of adjusting for subordination

Account	Amount Received after subordination adjustment
Notes payable (180,000 - 47,500)	132500