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	$

I only need the answers for d)!

Answer 1

Answer :-

a) Calculation of the amount that the sahre holders will receive :-

Total creditor claims are:

Current Liabilities = $300,000

First-mortgage Bond = $300,000

Second-mortgage Bond =$200,000

Debenture = $200,000

Subordinated debentures = $100,000

Total creditor claims = 300000 + 300000 + 200000 + 200000 + 100000 = $1,100,000

Trustee's cost = $45,000

Total claims = $1,145,000

The total proceeds from liquidation = $640,000

Thus with sale proceeds of $640,000 not all creditors' claim would be 'satisfied'.

This leaves $0 to shareholders.

b).Caluculation of the amount that  mortgage bondholders will receive :-

All fixed assets are pledged as collateral to the mortgage bonds. Hence the order of distribution of proceeds from sale of fixed assets will be first mortgage bond followed by second.

Proceeds from sale of fixed assets = $340,000

First mortgage bond holders get = $300,000

Second mortgage bondholders get the balance from proceeds from sale of fixed assets = $40,000

Unsatisfied claim of second mortgage bondholders is (200000 - 40000 =) $160,000 is converted to general creditor claims.

The other priority claimants are trustees' expenses, workers' wages, and the taxes due to the US Government.

These total at (45000 + 30000 + 40000 =) $115,000. These will be paid out in full from proceeds of current assets.

Balance left of proceeds from sale of current assets = 300000 - 115000 = $185,000

Now General creditor claims:

Hence second mortgage holder receives an additional amount= (185000 / 690000) * 160000 = $42,898.55

Amount bondholders receive (nearest dollar) = $300,000 + $40,000 + $42,899 = $382,899

c).

Given that all fixed assets are pledged as collateral to the mortgage bonds and the remaining priority claimants will be:
Claimant                                                         Amount
Trustee's expenses                                     $ 75,000
Workers' wages due                                      30,000
Governments' taxes due                               40,000
Total                                                             $145,000
That means from the total amount received from the liquidation = $670,000
Less: distributed to priority claimants ($430,000+145,000) = (575,000)
The balance amount can distribute to the general creditors = $95,000
Here, we can see the general creditor claims total:
Account                                                        Claim
Accounts payable                                    $ 50,000
Notes payable                                           180,000
Second mortgage bonds
(unsatisfied claim of $100,000 ) 100,000
Debentures                                               200,000
Subordinated debentures 100,000
Total $630,000

Thus, each claimant, before subordination adjustment, would receive $95,000/$630,000 = 0.150794 of his or her claim.
Therefore, the general creditors would receive:
Account                                                                                                                 Amount Received
Accounts payable(50,000*0.150794)                                                                     7,539.68
Notes payable (180,000*0.150794)                                                                        27,142.86
Second mortgage bonds 15,079.37 Debentures                                                                                                              30,158.73
Subordinated debentures                                                                                        

d). Finally, the after sub ordination adjustment: