Question

Chapter 7 Liquidation, Statement of Affairs Name Brand Company is to be liquidated under Chapter 7 of the Bankruptcy Code. The balance sheet on July 31, 20X1, follows: Assets Cash Marketable Securities Accounts Receivable (net) Inventory Prepaid Insurance Land Plant & Equipment (net) Franchises $ 5,000 30,000 105,000 160,000 7,000 80,000 412,000 72,000 Total $871,000 Liabilities and Equities Accounts Payable Wages Payable Taxes Payable Interest Payable Notes Payable Mortgages Payable Common Stock ($20 par) Retained Earnings (deficit) $265,000 20,000 12,000 37,000 280,000 220,000 240,000 (203,000) $871,000 Total Additional Information 1. Marketable securities consist of 1,000 shares of Wooly Inc. common stock. The stock's market value per share is $22. The stock was pledged against a $28,000, 10 percent note payable that has accrued interest of $1,400. 2. Accounts receivable of $50,000 are collateral for a $40,000, 12 percent note payable that has accrued interest of $4,000. 3. Inventory with a book value of $79,000 and a current value of $75,000 is pledged against accounts payable of $105,000. The appraised value of the remainder of the inventory is $76,000. 4. Only $1,500 will be recovered from prepaid insurance.

Answer 1

Solution:

Step:1 of 4

NAME BRAND COMPANY Statement of Affairs July 31, 20X1 Book Value Estimated Current Values Estimated Amount Availble to Unsecured Claims Estimated Gain (Loss) on Realization (Estimated Current Values-Book Value) Assets (1) Assets pledged with fully secured creditors: Accounts receivable (net) Less: 12% Note payable and interest (40,000 +4,000) 50,000 50,000 (44,000) 6,000 80,000 162,000 Land Plant and Equipment (net) 30,000 (12,000) 110,000 150,000 260,000 (234,600) Less: Mortgages payable and Interest (220,000 + 14,600) 25,400 30,000 (2) Assets Pledged with partially secured creditors: Marketable securities (1,000 Shares * $ 22 per share) Less: 10% Note payable and interest (28,000 + 1,400) (8,000) 22,000 (29,400) 79,000 (4,000) Inventory Less: Accounts payable 75,000 (105,000)

(3) Free Assets: 5,000 Cash 55,000 Accounts receivable (net) 81,000 Inventory 7,000 Prepaid Insurance 250,000 Plant and Equipment (net) 72,000 Franchises Estimated Amount Available Less: Creditors with priority Net Available to unsecured creditors Estimated Deficiency 871,000 Total Unsecured debt 5,000 55,000 76,000 1,500 190,000 30,000 5,000 55,000 76,000 1,500 190,000 30,000 388,900 (45,000) 343,900 82,500 (5,000) (5,500) (60,000) (42,000) $ $ (106,500) $ 426,400

Step:2 of 4

Working Notes: Calculation of Free Assets: Accounts receivable: Accounts Receivable Balance Less: Secured with fully creditors Accounts receivable (net) as free assets 105,000 (50,000) 55,000 Inventory: Inventory Balance less: Book Value of Inventory pledge against Notes Book Value of Inventory as free assets 160,000 (79,000) 81,000 Plant and Equipment: Book Value Less: Book Value mortgage Book Value of Plant and Equipment as free Assets 412,000 (162,000) 250,000 Fair value Less: Fair value mortgage Fair value of Plant and Equipment as free assets 340,000 (150,000) 190,000 Calculation of Estimated Deficiency Total unsecured debt Less: Amount available for unsecured creditors Estimated Deficiency 426,400 (343,900) 82,500

Step:3 of 4

Equities Estimated Amount unsecured Book Value (1) Fully secured creditors: 44,000 12% Note payable and interest 234,600 Mortgage payable and interest 44,000 234,600 278,600 29,400 (2) Partially secured creditors: 10% Note payable and interest Less: Marketable Securities 29,400 (22,000) 7,400 105,000 Accounts payable Less: Inventory 105,000 (75,000) 30,000 (3) Creditors with Priority: Estimated Liquidation expene 20,000 Wages Payable 12,000 Taxes Payable 13,000 20,000 12,000 45,000 160,000 212,000 17,000 (4) Unsecured Creditors: Accounts payable Notes payable Interest payable 160,000 212,000 17,000 (5) Stockholders' equity: 240,000 Common stock (203,000) Retained earnings (deficit) 871,000 $ $ 426,400

Step:4 of 4

Working Notes: Calculation of Unsecured Creditors: Accounts Payable Balance Less: Secured Accounts payable Unsecured accounts payable 265,000 (105,000) 160,000 Notes Payable Notes Payable Balance Less: Fully secured 12% Note payable Less: 10% Partial secured note payable Unsecured Note payable 280,000 (40,000) (28,000) 212,000 Interest payable Interest payable balance Less: Secured 12% accrued interest Less: Secured 10% accrued interest Less: Secured Mortagage Interest Unsecured Interest 37,000 (4,000) (1,400) (14,600) 17,000 b) Compute the estimated percentage settlement to unsecured creditors: Unsecured Creditor 426,400 Amount availble for payment 343,900 Percentage to unsecured creditors = (Amount Available for payment/Unsecured Credior) Percentage to unsecured creditors = (343,900 / 426,400) 80.65% Percentage settlement to unsecured creditors 80.65%