Question

A manufacturing firm has found itself in financial difficulty and may file for bankruptcy. Its statement of affairs reflects the following summarized information:

Book value of assets	$700,000
Net realizable value of assets	370,000
Total liabilities	400,000
Secured claims	250,000
Unsecured claims with priority	30,000

If the corporation owes a creditor P=9,000 secured by inventory that is expected to realize $7,000, how much can the creditor expect to receive on this claim?

Answer 1

Step 1: Determine the:

Net free assets = 370,000 – 250,000 – 30,000 = 90,000

Unsecured claims without priority = 400,000 – 250,000 – 30,000 = 120,000

Step 2: Determine the ERP.

ERP = 90,000/120,000 = 75%

Step 3: Compute the amount of claim.

Creditor can expect to receive 8,500 from the claims (7,000 inventory + (2,000 x 75%))

Creditor can expect to receive 8,500 from the claims