Question

Southwestern Wear Inc. has the following balance sheet:

Current assets	$1,875,000		Accounts payable	$375,000
Fixed assets	1,875,000		Notes payable	750,000
			Subordinated debentures	750,000
			Total debt	$1,875,000
			Common equity	1,875,000
Total assets	$3,750,000		Total liabilities and equity	$3,750,000

The trustee's costs total $263,750, and the firm has no accrued taxes or wages. Southwestern has no unfunded pension liabilities. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $2.5 million is received from sale of the assets?

Distribution of proceeds on liquidation:

1. Proceeds from sale of assets	$
2. First mortgage, paid from sale of assets	$
3. Fees and expenses of administration of bankruptcy	$
4. Wages due workers earned within 3 months prior to filing of bankruptcy petition	$
5. Taxes	$
6. Unfunded pension liabilities	$
7. Available to general creditors	$

Distribution to general creditors: Claims of General Creditors Claim (1) Application of 100% Distribution (2) After Subordination Adjustment (3) Percentage of Original Claims Received (4) Notes payable $ $ $ % Accounts payable $ $ $ % Subordinated debentures $ $ $ % Total $ $ $ The remaining $_______ will go to the common stockholders.

Answer 1

	SouthWestern Wear, Inc
	Distrubution of Proceeds of Liquidation	Amt $	Remarks
1	Proceeds from Sales of Assets	$       2,500,000
2	First Mortgage paid from Sales of assets	$                     -	No mortgage mentioned against assets
3	Trustee cost	$          263,750
4	Wages due for workers earned within 3 months prior to bankruptcy petition	$                     -
5	Accrued Taxes	$                     -
6	Unfunded pension Liabilities	$                     -
7	Available to general creditors	$       2,236,250

	Claims of General Creditors	Claim $	% weight of total claim	Amount allocated=1875000*p	After Suordination adjustment
	Notes Payable	$          750,000	40%	$           750,000	$    1,500,000
	AP	$          375,000	20%	$           375,000	$       375,000
	Subordinate debentres to NP	$          750,000	40%	$           750,000
	Total	$       1,875,000			$    1,875,000
8	Remaining amount available for Common shareholders =		$2236250-$1875000=	$           361,250