(ST–1)

Liquidation At the time it defaulted on its interest payments and filed for bankruptcy, Medford Fabricators Inc. had the following balance sheet (in millions 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 $750 million, while the current assets were sold for another $400 million. Thus, the total proceeds from the liquidation sale were $1,150 million. The trustee’s costs amounted to $1 million; no single worker was due more than $2,000 in wages; and there were no unfunded pension plan liabilities.

Current assets $ 800 Accounts payable $ 100 Accrued taxes 90 Accrued wages 60 Notes payable 300 Total current liabilities $ 550 Net fixed assets 1,100 First-mortgage bondsa 700 Second-mortgage bondsa 400 Debentures 500 Subordinated debenturesb 200 Common stock 100 Retained earnings (550)

Total assets $1,900 Total claims $1,900 Notes aAll fixed assets are pledged as collateral to the mortgage bonds.

bSubordinated to notes payable.