Question

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. Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $310,000, while the current assets were sold for another $350,000. Thus, the total proceeds from the liquidation sale were $660,000. The trustee's costs amounted to $65,000; 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 $

Answer 1

a) How much will McDaniel's shareholders receive from the liquidation? Round your answer to the nearest dollar.
Account payable	$          50.00
Accrued taxes	$          40.00
Accrued wages	$          30.00
Notes payable	$        180.00
Total current liabilities	$        300.00
First-mortgage bonds*	$        300.00
Second-mortgage bonds*	$        200.00
Debentures	$        200.00
Subordinated debentures**	$        100.00
Total claims	$     1,100.00
Creditor claims total $1,100,000 while the trustee has an additional $65,000 in claims, yet the liquidation produced only $660,000 in proceeds.  Since the proceeds are insufficient to satisfy the creditor and trustee claims, the shareholders receive nothing.
b) How much will the mortgage bondholders receive? Round your answer to the nearest dollar.
Distribution to first mortgage (paid from sale of fixed assets)	$ 300,000.00
Distribution to second mortgage (paid from sale of fixed assets after satisfying first mortgage holders)	$   10,000.00
Total preliminary distributions to priority claimaints	$ 310,000.00
The first mortgage holders receive their full  claim  of  $300,000,  while  the  second  mortgage  holders  receive  the  remaining $10,000.  This constitutes the total $310,000, so none of the proceeds from the sale of pledged assets  are available for distribution to generalcreditors.  Additionally, the second mortgage holders have $190,000 in unsatisfied claims which become general creditor claims.
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	$   65,000.00
Workers' wages due	$   30,000.00
Governments' taxes due	$   40,000.00
Total	$ 135,000.00
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.
Of the total $660,000 received from the liquidation,($3,10,000 + $135,000)  $445,000 has been distributed to priority claimants.  This leaves $215,000 to distribute to the general creditors.  But the general creditor claims total $630,000
Account	Amount Claim
Accounts payable	$   50,000.00
Notes payable	$ 180,000.00
Second mortgage bonds	$ 190,000.00
Debentures	$ 200,000.00
Subordinated debentures	$ 100,000.00
Total	$ 720,000.00
The  second  mortgage  holders'  unsatisfied  claim  of  $190,000  is  included.  Each  claimant,  before  subordination  adjustment, would  receive  $190,000/$720,000  = 0.26.39 of his or her claim.
Account	Amount Received
Accounts payable	$ 13,194.44
Notes payable	$ 47,500.00
Second mortgage bonds	$ 50,138.89	Plus $190000
Debentures	$ 52,777.78
Subordinated debentures	$ 26,388.89
Total	$ 190,000.00
d)
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 (180,000 - $47,500)	$ 132,500.00