Question

Liquidation Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable $375,000 Foxed assets 1.675.000 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 $285,250, and the form has no accrued taxes or wages. Southwestern has no unfunded pension lib .The debentures are subordinated the firm goes bankrupt and liquidates, how much will each class of investors receive it a total of $3 millions receved from sale of the asses? to the 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

Answer 1

Please find below table useful to compute desired results: -

1 Current assets 2 Fixed assets B 1875000 1875000 Accounts payable Notes Payable Subordinated Debentures Total Debt Common Equity Total Liabilities and equity 375000 750000 750000 =SUM(D1-D3) 1875000 =D4+D5 =B1+B2 6 Total Assets 7 8 Trustee's cots total 9 Sale of assets 285250 3000000 10 =B9 10 11 Proceeds from sale of Assets 12 First Mortgage paid from the sale of assets 13 Fees and Expenses of administration of bankruptcy 14 Wages due to workers of 3 months prior to bankruptcy application 15 Taxes 16 Unfunded pension liabilities 17 Availabe to general creditors 18 19 Claims of General Creditors 20 Notes Payable 21 Accounts Payable 22 Subordinated debentures 23 Total 24 25 The remaining 26 Claim Application of 100% distribution =B20 =D1 =B21 =D3 =B22 =SUM(B20:B22) =B23 After subordination adjustment %age of Original claims received =C20 =D20/B20 =C21 =D21/B21 =C22 =D22/B22 =C23 =D23/B23 will go to the common stockholders =B9-B8-B23 =B25/B23

End results would be as follows: -

A D 1 2 Current assets Fixed assets B 1,875,000 Accounts payable 1,875,000 Notes Payable Subordinated Debentures Total Debt Common Equity 3,750,000 Total Liabilities and equity 375.000 750,000 750,000 1.875,000 1,875,000 3,750,000 285,250 3,000,000 3.000.000 285,250 6 Total Assets 7 8 Trustee's cots total 9 Sale of assets 10 11 Proceeds from sale of Assets 12 First Mortgage paid from the sale of assets 13 Fees and Expenses of administration of bankruptcy 14 Wages due to workers of 3 months prior to bankruptcy application 15 Taxes 16 Unfunded pension liabilities 17 Availabe to general creditors 18 19 Claims of General Creditors 20 Notes Payable 21 Accounts Payable 22 Subordinated debentures 23 Total 24 25 The remaining 26 285,250 Claim 750.000 375,000 750,000 1.875,000 Application of 100% distribution 750,000 375.000 750,000 1.875,000 After subordination adjustment 750,000 375.000 750,000 1,875,000 %age of Original claims received 100% 100% 100% 100% 839,750 will go to the common stockholders 44.79%