Question

The following balance sheet has been prepared by the accountant for Limestone Company as of June 3, 2017, the date on which the company Is to file a voluntary petition of bankruptcy: LIMESTONE COMPANY Balance Sheet June 3, 2017 Assets 6, eee 68,eee 94, eee Cash $ Accounts receivable (net) Inventory Land 103,eee 303,eee 186,eee Buildings (net) Equipment (net) $ 760,00e Total assets Liabilities and Equities Accounts payable Notes payable-current (secured by equipment) Notes payable-long term (secured by land and buildings) $ 104,eee 256, eee 193, eee 123,eee 84,eee Common stock Retained earnings $ 760,eee Total liabilities and equities Additional Information If the company Is liquidated, administrative expenses are estimated at $21,000. The accounts payable figure includes $13,000 in wages earned by the company's 12 employees during May. No one earned more than $2,500. Liabilties do not include taxes of $17,000 owed to the U.S. government. Company officlals estimate that 40 percent of the accounts recelvable will be collected In a liquidation and that the Inventory disposal will bring $83,000. The land and bulldings will be sold together for approximately $316,000; the equipment should bring $133,000 at auction

Answer 1

LIMESTONE COMPANY
Statement of Financial Affairs
June 3,2017
Book Value	Assets		Available for Unsecured Creditors
	Pledged with fully secured creditors
$406,000	Land and Building	$193,000	$123,000
$186,000	Equipment	$133,000	$0
$68,000	Accounts receivable		$27,200
$94,000	Inventory		$83,000
$6,000	Cash		$6,000
	Total amount available to pay liabilities with priority and unsecured creditors	$239,200
	Priority Creditors	$50,000
	Available for unsecured creditors	$189,200
	Estimated deficiency		$244,800
$760,000			$484,000
Book Value	Liabilities and Stockholders Equity		Unsecured Non priority liabilities
	Liabilities with priority
$21,000	Administrative expenses	$21,000
$12,000	Wages	$12,000
$17,000	Taxes owed to the Government	$17,000
$50,000	Total	$50,000
	Fully secured creditors
$256,000	Notes payable - current	$256,000	$123,000
$193,000	Notes payable - long term	$193,000
$104,000	Accounts payable		$104,000
$207,000	Stockholders equity		$207,000
$860,000			$434,000

Working Notes :

1.Priority creditors get precedence before secured creditors,meaning that they should be paid before the secured and unsecured creditors are paid. Wages,Statutory taxes and administrative expenses payable to the liquidator are priority expenses.

2. Notes payable - current for $ 256,000 were secured against Equipment which realized only $ 133,000 in auction.The balance notes payable of $ 123,000( $ 256,000-$133,000) will therefore be treated as unsecured creditors.

3. Notes payable - long term liability for $ 193,000 were secured against Land and Building which realized $ 316,000 and were satisfied in full. The surplus amount of $ 123,000 would be available to pay off the unsecured creditors.

4. Other current assets like inventory, accounts receivable & cash which were pledged against any payable will be available to pay off the unsecured creditors and the share holders.

5. In the above mentioned problem, against the amount payable to creditors $ 104,000 we have an available balance of $ 189,200. Hence,the accounts payable would be satisfied in full and the balance surplus of $ 85,200 would be available to the common stock holders against their net receivable of $ 207,000 ( Common stock $ 123,000 plus Retained earnings $ 84,000).

6. Hence, the Common stock holder will realize $ 0.41 against his investment of $ 1