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 $390,000, while the current assets were sold for another $150,000. Thus, the total proceeds from the liquidation sale were $540,000. The trustee's costs amounted to $50,000; 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.
   $

   0

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

   blank

   
   
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	$ blank
   Workers' wages due	$ blank
   Governments' taxes due	$ blank
   Total	$ blank

   
   
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	$ blank
   Notes payable	$ blank
   Second mortgage bonds	$ blank
   Debentures	$ blank
   Subordinated debentures	$ blank
   Total	$ blank

   
   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	$ blank
   Subordinated debentures	$ blank

Answer 1

We can calculate the desired results as follows

a) Total proceeds from the liquidation sale were $540,000.

McDaniel's shareholders receive amount if any left after paying to the Creditors of the company. So we will calculate the Claims of Creditors as below to know if any additional amount is left aside..

All the amounts are in thousands of dollars

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 claims	$ 1,100

Creditor claims total $1,100,000 but the liquidation of the company produced only $540,000 in proceeds. Since the proceeds from liquidation are insufficient to satisfy the creditors, So the Shareholders will receive nothing from the liquidation and the answer is $ 0.00.

b) The Mortgage Bondholders are entitled to receive the amount from the Sale of the fixed assets, which were pledged as collateral to them and the amount realised from these assets are $ 390,000.

Distribution to first mortgage (paid from sale of fixed assets) $ 300,000

Distribution to second mortgage (paid from sale of fixed assets after satisfying first mortgage holders) $ 90,000

Total amount distributed to mortgage bondholders is $ 390,000.00
  
The first mortgage holders receive their full claim of $300,000, while the second mortgage holders will receive only the remaining amount of $90,000 from the total due of $ 200,000. So, second mortgage holders didn't receive additional $ 110,000.

c) The amount that the Priority claimants will receive from the liquidation is as below

Amount that the company aquired from sale of current assets is $ 150,000 which is used to fulfill the claims of priority claimants

Claimant	Amount
Trustee's expenses	$ 50,000
Workers' wages due	$ 30,000
Governments' taxes due	$ 40,000
Total	$ 120,000

So,the amount that the Priority claimants will receive from the liquidation is $ 120,000.

d) Amount that the remaining general creditors receive from the distribution before subordination adjustment is as follows

Amount Left = Total Sales proceeds - Paid to Bondholders - Paid to Priority claimants

= 540,000 - 390,000 - 120,000

= $ 30,000

Amount remaining to be paid

= Accounts payable + Notes payable + Second mortgage bonds + Debentures + Subordinated debentures

= 50,000 + 180,000 + 110,000 + 200,000 + 100,000

= $ 640,000

So, each claimant will receive = Amount Left / Amount Due

= 30,000 / 640,000

= 0.04687 or 4.687% of amount due to them

Accounts payable (50,000 * 4.687%)	$ 2,343
Notes payable	$ 8,437
Second mortgage bonds	$ 5,156
Debentures	$ 9,376
Subordinated debentures	$ 4,688
Total Amount available to pay	$ 30,000

As there are multiple parts, so first 4 parts have been answered.

Hope I am able to solve your concern. If you are satisfied hit thumbs up !!