Question

Liquidation

At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the 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 $330,000, while the current assets were sold for another $180,000. Thus, the total proceeds from the liquidation sale were $510,000. The trustee's costs amounted to $55,000; no single worker was due more than the maximum allowable wages per worker; and there were no unfunded pension plan liabilities.

Balance Sheet (Thousands of Dollars)
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 bondsa		300
				Second-mortgage bondsa		200
				Debentures		200
				Subordinated debenturesb		100
				Common stock		50
				Retained earnings		(150)
Total assets	$	1,000		Total liabilities & equity	$	1,000
Notes: aAll fixed assets are pledged as collateral to the mortgage bonds. bSubordinated to notes payable only.

1. How much will McDaniel's shareholders receive from the liquidation? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answer to the nearest dollar. If no entry is required, enter "0".

   $  

2. How much will the first mortgage bondholders receive from collateralized assets? Will they receive their full claim? If not, how much is their remaining claim? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar. If no entry is required, enter "0".

   The first mortgage bondholders will receive $   from collateralized assets that -Select-isis notItem 3 equal to their full claim. Therefore, the first mortgage holders have $   in unsatisfied claims.

3. How much will the second mortgage bondholders receive from collateralized assets? Will they receive their full claim? If not, how much is their remaining claim? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar. If no entry is required, enter "0".

   The second mortgage bondholders will receive $   from collateralized assets that -Select-isis notItem 6 equal to their full claim. Therefore, the second mortgage holders have $   in unsatisfied claims.

4. How much will the other priority claimants (in addition to the mortgage bondholders) receive from the liquidation? Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar.

   Remainging primary claimants	Amount
   Trustee's expenses	$
   Workers' wages due	$
   Governments' taxes due	$
   Total	$

5. How much will the remaining general creditors receive from the distribution before subordination adjustment? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar.

   Account	Amount Received before subordination adjustment
   Accounts payable		$
   Notes payable		$
   Second mortgage bonds		$
   Debentures		$
   Subordinated debentures		$
   Total		$

   How much will the remaining general creditors receive after subordination? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answers to the nearest dollar. If no entry is required, enter "0".

   Account	Amount Received after subordination adjustment
   Accounts payable		$
   Notes payable		$
   Second mortgage bonds		$
   Debentures		$
   Subordinated debentures		$
   Total		$

   How much in total will the second mortgage holders receive (include the amount received from collateral)? Do not round intermediate calculations. Write out your answer completely. For example, 5 thousand dollar should be entered as 5,000. Round your answer to the nearest dollar.

   $  

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 .
Creditor claims total $1,100,000 while the trustee has an additional $55,000 in claims, yet the liquidation produced only $510,000 in proceeds.  Since the proceeds are insufficient to satisfy the creditor and trustee claims, the shareholders receive nothing.
b) & c) 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)	$         30,000.00
Total preliminary distributions to priority claimaints	$       330,000.00
The first mortgage holders receive their full  claim  of  $300,000,  while  the  second  mortgage  holders  receive  the  remaining $30,000.  This constitutes the total $330,000, so none of the proceeds from the sale of pledged assets  are available for distribution to general creditors.  Additionally, the second mortgage holders have $170,000 in unsatisfied claims which become general creditor claims.
d) 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	$         55,000.00
Workers' wages due	$         30,000.00
Governments' taxes due	$         40,000.00
Total	$       125,000.00
e) 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 $510,000 received from the liquidation,($3,30,000 + $125,000)  $455,000 has been distributed to priority claimants.  This leaves $55,000 to distribute to the general creditors.  But the general creditor claims total $700,000
Account	Amount Claim
Accounts payable	$         50,000.00
Notes payable	$       180,000.00
Second mortgage bonds	$       170,000.00
Debentures	$       200,000.00
Subordinated debentures	$       100,000.00
Total	$       700,000.00
The  second  mortgage  holders'  unsatisfied claim  of  $170,000  is  included.  Each claimant,  before  subordination  adjustment, would  receive  $55,000/$700,000  = 0.07857 of his or her claim.
Account	Amount Received
Accounts payable	$         3,928.57
Notes payable	$       14,142.86
Second mortgage bonds	$         1,331.91	Plus $170000
Debentures	$       15,714.29
Subordinated debentures	$         7,857.14
Total	$         42,974.77