Question

A company preparing for a Chapter 7 liquidation has the following liabilities: • Note payable A of $110,000 secured by land having a book value of $60,000 and a fair value of $80,000. . Note payable B of $140,000 secured by a building having a $70,000 book value and a $50,000 fair value. • Note payable C of $70,000, unsecured. Administrative expenses payable of $30,000. • Accounts payable of $130,000. • Income taxes payable of $40,000. The company also has these other assets: . Cash of $16.800. • Inventory of $120,000 but with a net realizable value of $70,000. • Equipment of $110,000 but with a net realizable value of $60,000. How much will each of the company's liabilities be paid at liquidation? Amount Payment on note payable A Payment on note payable B Payment on note payable C Payment on administrative expenses Payment on accounts payable Payment on income taxes payable

Answer 1

Sol: Liquidation is a process of closing down the Business Liquidation is a process of selling Assets and settlement o abilities. Liabilities will be settled in the following sequence, a) Secured ouditors 6) Preferential creditors c) Umsewred Oreditors d Preference share holders e) Equity share Holders Note: () It there is any deficiency left to secured creditors, it is paid under "unsecured creditors" for example: Investment in the hand of Bank for an overdraft Rs. 38,00,000. Estimated Realise value investment is 34,00,000) is paid Rs. 34,00,000 . Therefore R$ 4,09000 CRs 36,00 000 as unsecured creditors. (1) Preferential creditors i In the event of winding up they should be paid in priority to all other debts. a) Government : All revenue, taxes, cens etc. whether payable to government or local authority, due and payable by the company within 12 months before the date a commencement g winding up. (b) Employees • au wage salaries y any Employce fel a period not exceeding 4 months within the said 12 months not exceeding Rs. 20,000 per claimant is preferential. • salaries due to officer like director, manager, branch manager Ste are not prefèntial (0) Investigation Expenses as per sections of Delevant act.

Statement showing how much will Each of the company's liabilities be paid at liquidation" Particulas Asset Realised Cash 16,800 Inventory 70,000 Equipment 60,000 1,46,800 Anse cured creditors Note Payable A 110,000 Less: Land (secured) (80,000 :. Deticiency $ 30,000 is paid as unsecured 30,000 creditors Note Payable B | 1,40,000 lensi secured by Building (50,000) 2. Deficiency of $90,000 is paid as 90,000 Unsecured Creditors Prefential creditors Income Taxes payable (40,000) Cassuming whole amount is payable within 12 month before the date g Commencement g winding up.] i Estimated Surplus as regards to unsecured creditors 106800

Amount payable to unsecured creditoys Note payable A = 30,000 Cihrem Statement above] bt Povable B = 90,000 (from Statement above] Note payable C = 70,000 [ Given] Administrative Exp. = 30,000 [given] Accounts payable = 1,30,000 Accounts pay 3,50,000 than Since Amount payable to Unsecured creditors is more amount available with company, they should be paid in propoition. Note payable A = 106800 x 30,000 = 9154 3,50,000 Note payable B - 106800 x 90,000 = 27463 3,50,000 Notr payable C = 106800 x 70,000 = 713 60 3,50,000 Administrative Exp = 106800 x 30,000 = 9154 3,50,000 Accounts payable = 106800 X 1,30,000 = 39669 3,50,000 106800 . Companiji liabilities paid for each Not payable A C80,000 9154) Not payable B (50,000 274637 89154 Note payable C Administratie Expenses 21,360 Accounts payable 9154 Income Tax payable $ 77,463 39669 40000,
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