Question

33) Down Dog Corporation filed a petition under Chapter 7 of the U.S. Bankruptcy Act on June 30, 2017. Data relevant to its financial position as of this date are:

Estimated Net

Book ValueRealizable Values

Cash              $    3,000              $     3,000

Accounts receivable-net               72,000              48,000

Inventories              60,000              72,000

Equipment-net              165,000                  87,000

Total assets              $300,000              $210,000

Accounts payable              $ 72,000

Rent payable               21,000

Wages payable              45,000

Note payable plus accrued interest              96,000

Capital stock              180,000

Retained earnings (deficit)              (120,000)

Total liabilities and equity              $300,000

Required:

A. Prepare a statement of affairs assuming that the note payable and interest are secured by a mortgage on the equipment and that wages are less than $4,650 per employee.

B. Estimate the amount that will be paid to each class of claims if priority liquidation expenses including trustee fees are $24,000 and estimated net realizable values are actually realized.

Answer 1

Answer:
A.
Down Dog Corporation
Statement of Affairs
June 30, 2017

               Deficiency
               Account
   Book Value   Assets   Realizable Value       (Loss/Gain)
Pledged with partially secured creditors
   $165,000   Equipment-net   $87,000       (78,000)
       Less: Note payable and accrued interest   (96,000)  
       Unsecured amount (See below)   (9,000)

       Free Assets
   3,000   Cash   3,000
   72,000   Accounts receivable-net   48,000       (24,000)
   60,000   Inventories   72,000       12,000
       Total net realizable value   123,000
       Less: Priority liabilities – wages payable   <45,000>
       Total available for unsecured creditors   78,000
   ______   Estimated deficiency to unsecured creditors   30,000       ______
   $300,000       $108,000       (90,000)

   Unsecured
   Book Value   Equities   Liabilities

       Priority liabilities
   $ 45,000   Wages payable (assumed under
$4,650 per employee)   $ 45,000

       Partially secured creditors
   96,000   Note payable and accrued interest   $ 96,000
       Less: Equipment pledged as security   (87,000)   $ 9,000

       Unsecured creditors
   72,000   Accounts payable       72,000
   27,000   Rent payable       27,000

       Stockholders’ equity
   180,000   Capital stock           180,000
   (120,000)   Retained earnings (deficit)       ______   (120,000)
   $300,000           $108,000   $ 60,000
       Estimated Deficiency           $(30,000)

B.   Estimated payments per dollar for unsecured creditors

Cash available   $210,000

Distribution to partially secured and unsecured priority creditors:
   Note payable and interest   $87,000
   Administrative expenses   24,000
   Wages payable   45,000   < 156,000>
   Available to unsecured nonpriority creditors        $ 54,000

Note payable and interest (unsecured portion)       $ 9,000
Accounts payable       72,000
Rent payable       27,000

   Unsecured nonpriority claims       $108,000

($54,000 / $108,000 = $0.50 per dollar)

Partially secured
Note payable and interest
   Secured portion   $87,000
   Unsecured portion ($9,000 × 0.50)   4,500   $91,500

Unsecured priority
   Administrative expenses   $24,000
   Wages payable   45,000   69,000

Unsecured nonpriority
   Accounts payable ($72,000 × 0.50   $36,000
   Rent payable ($27,000 × 0.50)   13,500   49,500
Total payments      $210,000