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 $276,000, 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.

Distribution of proceeds on liquidation
Proceeds from sale of Assets		3000000
1. First mortgage, paid from sales of assets	0
2. Fees and expenses of administration of bankruptcy	276000
3. Wages due to worker earned 3 months prior to filing of bankruptcy petition	0
4. Taxes	0
5. Unfunded pension liabilities	0	276000
Amount available to general creditors and investors		2724000

2.

Distribution to General Creditors
Claims of General Creditors	Claim (1)	Application of 100% Distribution (2)	After Subordination Adjustment (3)	% 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

3. Amount Available for Common Stockholders

= 2724000 - 1875000 = $ 849,000

It means common stockholders will receive only 45.28% of their claims. (849,000 /1,875,000 *100)

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