Question

A statement of financial affairs created for an insolvent corporation that is beginning the process of liquidation discloses the following data (assets are shown at net realizable values):

Assets pledged with fully secured creditors $ 236,000

Fully secured liabilities 168,000

Assets pledged with partially secured creditors 398,000

Partially secured liabilities 526,000

Assets not pledged 318,000

Unsecured liabilities with priority 171,600

Accounts payable (unsecured) 408,000

A. This company owes $21,000 to an unsecured creditor (without priority). How much money can this creditor expect to collect?

B. This company owes $136,000 to a bank on a note payable that is secured by a security interest attached to property with an estimated net realizable value of $98,000. How much money can this bank expect to collect?

A. Expected amount by creditor:

B. Expected amount by Bank:

Answer 1

The order or rank for distribution of realization proceeds upon liquidation are as follows-
1) Proceeds to fully secured creditors out of secured assets
a) The unsecured creditors with priority, and,
b) Fully Secured creditors ; stands at par with each other

2) Secured portion of Partially secured assets to the partially secured creditors

3) Unsecured portion of partially secured creditors and unsecured creditors stands at par with each other.

Hence, the distribution chart is presented as follows-

Requirement A-

Amount owed to Unsecured creditor (without priority) = $ 21,000
Realization rate = 40%
Amount expected by the creditor = (21000*40%) = $ 8,400

Requirement B-

Amount owed to bank = $ 136,000
(-) Paid out of secured assets ($ 98,000)
Balance debt $ 38,000
Realization on above (38000*40%) $ 15,200

Hence, amount expected by bank = 98000+15200 = $ 113,200