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Problem 24-01

Liquidation

Southwestern Wear Inc. has the following balance sheet:

Current assets$1,875,000Accounts payable$375,000Fixed assets1,875,000Notes payable750,000Subordinated debentures750,000Total debt$1,875,000Common equity1,875,000Total assets$3,750,000Total liabilities and equity$3,750,000

The trustee's costs total $272,000, and the firm has no accrued taxes or wages. Southwestern has no unfunded pension liabilities. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $2.5 million is received from sale of the assets?

Distribution of proceeds on liquidation:

1. Proceeds from sale of assets$2. First mortgage, paid from sale of assets$3. Fees and expenses of administration of bankruptcy$4. Wages due workers earned within 3 months

prior to filing of bankruptcy petition$5. Taxes$6. Unfunded pension liabilities$7. Available to general creditors$

Distribution to general creditors:

Claims of General Creditors

Claim

(1)Application of 100% Distribution

(2)After Subordination Adjustment

(3)Percentage of Original Claims Received

(4)Notes payable$$$%Accounts payable$$$%Subordinated debentures$$$%Total$$$

The remaining $will go to the common stockholders.

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