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( protection from creditors granted to individuals or companies who legally file for bankruptcy, providing for liquidation of certain assets to pay debts.). Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $350,000, while the current assets were sold for another $170,000. Thus, the total proceeds from the liquidation sale were $520,000. 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.

How much will McDaniel's shareholders receive from the liquidation? Round your answer to the nearest dollar.
$

How much will the mortgage bondholders receive? Round your answer to the nearest dollar.
$

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	$

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	$

Answer 1

1. Amount to be paid to mortgage Bondholders
Amount recovered from sale of fixed assets which are pledged as collateral to mortgage Bondholders - $ 350,000
As amount payable to First Mortgage Bonds is $ 300,000, it would be settled as full out of 350,000
Remaining amount of $ 50,000 would be paid to Second Mortgage Bonds. After that, Second mortgage Bondholder will received their remaining amount $ 150,000 (200000-50000) along with other Creditors.
2. Amount to be received the other priority claimholders from liquidation -
Amount recovered from sale of Current assets- $ 170,000
It would be paid between below claimants as below -
Claimant	Total Amount to be paid
	($)
Trustee's expenses	70,000
Workers' wages due	30,000
Governments' taxes due	40,000
	1,40,000
Hence, out of $170,000 , all the above three claimants shall be settled .
After that, McDaniel Mining Company keep balance of $ 30,000
3. Amount that remaining general creditors receive from the distribution before subordination adjustment
Balance Amount - $ 30,000
It would be paid between below claimants as below -
Account	Amount Payable	Ratio	Amount to be distributed proportionately
Accounts payable	50,000	7%	2,205.88
Notes payable	1,80,000	26%	7,941.18
Remaining portion - Second mortgage bonds	1,50,000	22%	6,617.65
Debentures	2,00,000	29%	8,823.53
Subordinated debentures	1,00,000	15%	4,411.76
	6,80,000	100%	30,000
4. effect of adjusting for subordination
As mentioned in question that Subordinated debentures are subordinated to notes payable only, the Subordinated debentures holders would receive their claims only after full payment of notes payable.
Since the balance amount after payment to secured bondholders and priority claimants is only $ 30,000 and outstanding balance of notes payable is $ 180,000, it can be concluded that notes payable could not be settled in full. Hence, Subordinated debenture holders would not receive any amount after effect of subordination.
5. McDaniel's shareholders receive from the liquidation
Since all other liabilities are not fully paid, shareholders of company would receive nil.