Question

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 $490,000, while the current assets were sold for another $280,000. Thus, the total proceeds from the liquidation sale were $770,000. The trustee's costs amounted to $70,000; 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

Total Receivable and order of payables as follows

Particulars	Amount
FA	4,90,000
Other Assets	2,80,000
Total Receipts	7,70,000
Trustees Cost	-70,000
First mortagage Debtors	-3,00,000
Second mortagage Debtors	-1,90,000
Accrued wages	-30,000
Accrued taxes	-40,000
Debentures	-1,40,000
Total Payables	-7,70,000

a) Nil

b) 490,000

C)

Trustees Cost	-70,000
Accrued wages	-30,000
Accrued taxes	-40,000
Total	-1,40,000

d)

Second mortagage Debtors	-1,90,000
Debentures	-1,40,000
Total	-3,30,000