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 $222,750, 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 $3 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

1. Proceeds from sale of assets = 3000000

2. First mortgage, paid from sale of assets = 0

3. Fees and expenses of administration of bankruptcy = 222750

4. Wages due workers earned within 3 months prior to filing of bankruptcy petition = 0

5. Taxes = 0

6. Unfunded pension liabilities = 0

7. Available to general creditors= 2777250

8. Distribution to general creditors =1875000

9. Amount will go to common stockholders= 902250

Base for the solution :

Balance available to investors = Total funds received - Trustees cost

= 3000000-222750

= 2777250

Claims of General Creditors	Claim (1)	Application of 100% Distribution (2)	After Subordination Adjustment (3)	Percentage of Original Claims Received (4)
Notes payable	750000	750000	750000	100%
Accounts payable	375000	375000	375000	100%
Subordinated debentures	750000	750000	750000	100%
Total	1875000	1875000	1875000	100%

Balance available for stockholders = Balance to investors-payments to Accounts payable-notes payable-subordinated debentures

= 2777250-375000-750000-750000

= 902250.