The trustee in the bankruptcy settlement for Immobile Homes lists the following book values and liquidation values for the assets of the corporation. Liabilities and shareholders' claims are also shown.

a. Compute the difference between the liquidation value of the assets and the liabilities.
b. Based on the answer to part a, will preferred stock or common stock participate in the distribution?
c. Given that the administrative costs of bankruptcy, workers' allowable wages, and unpaid taxes add up to $400,000, what is the total of remaining asset value available to cover secured and unsecured claims? (Wages and taxes owed totalled $50,000.)
d. After the machinery and equipment is sold to partially cover the first lien secured claim, how much will be available from the remaining asset liquidation values to cover unsatisfied secured claims and unsecured debt?
e. List the remaining asset claims of unsatisfied secured debt holders and unsecured debt holders in a manner similar to that shown at the bottom portion of Table 16A--4.

Table 16A-4

Asset values:
Asset values in liquidation ... . .... ..... ............................................................$700,000
Administrative costs, wages, and taxes............................................................100,000
Remaining asset values . . ........ .. . . . .. .........................................................600,000
Payment to secured creditors..........................................................................-100,000
Amount available to unsatisfied secured claims and unsecured debt..........$ 500,000
Remaining claims of unsatisfied secured debt and unsecured debt:
Secured debt (unsatisfied first lien) .............................................................$ 100,000
Accounts payable ..... . . ........ ....... .................................................................300,000
Senior unsecured debt . ....... . ........................................................................400,000
Subordinated debentures .... . .. . .... . ... .. .. ..................................................200,000
...................................................................................................................$1,000,000

f. Compute a ratio of your answers in part d and part e. This will indicate the initial allocation ratio.
g. List the remaining claims (unsatisfied secured and unsecured) and make an initial allocation and final allocation similar to that shown in Table 16A 5. Subordinated debenture holders may keep the balance after full payment is made to senior debt holders.

Table 16A-5

h. Show the relationship of amount received to total amount of claim in a similar fashion to that of Table 16A-6. (Remember to use the sales (liquidation] value for machinery and equipment plus the allocation amount in partgto arrive at the total received on secured debt.)

Table 16A-6

Transcribed Image Text:

Liquidation Book value value Assets Accounts receivable.... Inventory...... Machinery and equipment.. Building and plant...... $1,000,000 $ 700,000 600,000 1,100,000 800,000 3,000,000 $5,900,000 $3,500,000 400,000 1,800,000 Total assets...... Liabilities and Shareholders' Claims Liabilities: $2,000,000 Accounts payable..... First lien, secured by machinery and equipment Senior unsecured debt . ... 650,000 1,300,000 Subordinated debentures. 1,450,000 5,400,000 Total liabilities.... Shareholders' claims: Preferred stock ... 100,000 400,000 500,000 $5,900,000 Common stock Total shareholders' claims.. Total liabilities and shareholders' claims.. (2) Amount of (3) Initial Allocation (50%) (4) Amount (1) Category Secured debt (unsatisfied 1st lien). ...... Accounts payable..... Senior unsecured debt Subordinated debentures. Claim Received $ 100,000 $ 50,000 $ 50,000 300,000 150,000 150,000 400,000 200,000 300,000 200,000 $1,000,000 100,000 $500,000 $500,000