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. Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $390,000, while the current assets were sold for another $280,000. Thus, the total proceeds from the liquidation sale were $670,000. 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

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

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

Notes payable $

Subordinated debentures $

Answer 1

Discharge of Sale proceeds on priority basis:

Details	Amount
Proceeds:
Sale of Fixed Assets	$200,000
Sale of Current Assets	$400,000
Total Proceeds	$600,000
Discharge:
Trustees Costs	$50,000
Accrued Wages	$30,000
First-mortgage bonds	$300,000
Second-mortgage bonds	$200,000
Debentures	$20,000
Total Discharge	$600,000

1. How much will McDanielas shareholders receive from the liquidation.

As per liquidation process, proceeds are distributed on priority basis and therefore nothing left for common stockholders

2. How much will the mortgage bondholders receive

First mortgage bondholders and Second mortgage bondholders will receive $300,000 and $200,000 respectively.

3. How much will other priority claimants receive from the liquidation

The next priority claimants after mortgage bondholders are debenture holders and he could receive $20,000 from the liquidation.

4. How much will the remaining general creditors receive from the distribution before subordination adjustment? What is the effect of adjusting for liquidation?

The general creditors are listed below but as per the priority basis all the sale proceeds discharged on priority basis and general creditors got nothing left.

Details	Amount
Debentures ($200,000 - $20,000)	$180,000
Subordinated debentures	$100,000
Common Stock	$50,000
Accrued Taxes	$40,000
Accounts Payable	$50,000
Notes Payable	$180,000
Total of unadjusted settlements	$600,000