(22–3)

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 $400,000, while the current assets were sold for another $200,000. Thus, the total proceeds from the liquidation sale were $600,000. The trustee’s costs amounted to $50,000; no single worker was due more than $2,000 in wages; and there were no unfunded pension plan liabilities.

Chapter 22: Bankruptcy, Reorganization, and Liquidation 893 Current assets $ 400 Accounts 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 claims $1,000 Notes aAll fixed assets are pledged as collateral to the mortgage bonds.

bSubordinated to notes payable.