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 $350,000, while the current assets were sold for another $260,000. Thus, the total proceeds from the liquidation sale were $610,000. The trustee's costs amounted to $25,000; 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

McDaniel Mining Co
Total Claim	$       1,000,000
Available amount
Fixed Asset sale	$          350,000
Current Asset sale	$          260,000
Total available amount	$          610,000
Ans a
Total Claim $1000000 and Trustee cost =$25000.
But available amount is $610,000
so shareholders will not get anything as the available amount
will be fully distributed to settle other claims and truct cost.
b.
Amount from Fixed asset sale=	$          350,000
Fist Mortgage Bond will get	$          300,000
Second Mortgage Bond will get	$            50,000
Balance Amount of 2nd Mortgage bond=200000-50000
=$150,000
So $150,000 will be treated under General Clain and
will get $36397 as per proportion
Total amount 2nd Mortgage Bond received=$50,000+ $36397=			$                      86,397
c
Othyer priority Claimants
Claimant	Amt
Trustee exp	$            25,000
Taxes Payable	$            40,000
Wages Payable	$            30,000
Total	$            95,000
d
Amount for General Creditors
Total collection=	$          610,000
Fist Mortgage Bond will get	$          300,000
Second Mortgage Bond will get	$            50,000
Other Priority claimants get=	$            95,000
Total Distrubuted	$          445,000
Available for General Creditors	$          165,000
General Claims Outstanding	Amt	% of value=p	Amounts for distribution in value proportion=p*165000
Accounts Payable	$            50,000	7.35%	$                      12,132
Notes payable	$          180,000	26.47%	$                      43,676
Balance of 2nd Mortgage	$          150,000	22.06%	$                      36,397
Debentures	$          200,000	29.41%	$                      48,529
Subordinated Debentures	$          100,000	14.71%	$                      24,265
Total	$          680,000	100.00%
Available amount for distribution	$          165,000		$               165,000.00
So Amounts receivable by General creditors
Accounts Payable	$            12,132
Notes payable	$            67,941	=43676+24265
Balance of 2nd Mortgage	$            36,397
Debentures	$            48,529
Subordinated Debentures	$                     -	addded to note payable as subordinated to it.
Total	$          165,000
Effect of adj for subordination	Amt $
Notes payable	$            67,941
Subordinated Debentures	$                     -