Bankruptcy problem

Assets Liabilities and Equity

Cash $40,000 Accounts payable $200,000

Accounts receivable 200,000 Accrued wages 50,000

Secured bank loan 150,000

Unsecured bank loan 250,000

Inventory 400,000 Mortgage 300,000

Plant and equipment 360,000 Subordinated debentures 60,000

Junior subordinated debentures 40,000

Common stock 50,000

Retained earnings (100,000)

The firm defaults and the only solution is a liquidate, so the question becomes how much each claimant receive.

A buyer is found for the receivable for $0.80 per $1.00.

The inventory, which secures the bank loan, can be sold for $0.60 on the $1.00.

The plant and equipment, which secures the mortgage, are sold for $200,000.

The payables are equally subordinated to both bank loans.

The subordinated debentures are subordinated to the mortgage.

The junior subordinated debentures are subordinated to the subordinated debentures.

Court costs, pension costs have previously been covered.

How much is available to pay general credits?

What are the amounts of each general creditors claims?

• Accounts receivable
• Accounts payable
• Accrued wages
• Secured bank loan
• Unsecured bank loan
• Mortgage
• Senior subordinated debentures
• Junior subordinated debentures
• Common stock

If the absolute order of claims is maintained, how much do the holders of each general creditors receive?

• Accounts receivable
• Accounts payable
• Accrued wages
• Secured bank loan
• Unsecured bank loan
• Mortgage
• Senior subordinated debentures
• Junior subordinated debentures
• Common stock

Would your previous answers be different if the senior subordinated debentures were not subordinated to the mortgage (i.e., not subordinated)?