Question

Liquidation

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 $215,250, 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 $3.5 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

Distribution of proceeds on liquidation:
1. Proceeds from sale of assets	$ 35,00,000.00
2. First mortgage, paid from sale of assets	0
3. Fees and expenses of administration of bankruptcy	$   2,15,520.00
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 ($3,500,000 -215,520)	$ 32,84,480.00
Distribution to general creditors:
Claims of General Creditors	Claim	Application of 100% Distribution	After Subordination Adjustment	Percentage of Original Claims Received
	1)	2)	3)	4)
Notes payable	7,50,000	7,50,000	7,50,000	100%
Accounts payable	3,75,000	3,75,000	3,75,000	100%
Subordinated debentures	7,50,000	7,50,000	7,50,000	100%
Total	18,75,000	18,75,000	18,75,000
The remaining $1,409,840 ($3,284,480 -1,875,0000 ) will go to the common stockholders.