Problem #3 (Bankruptcy Pecking Order) Please give step by step answers At the ti
ID: 2425879 • Letter: P
Question
Problem #3 (Bankruptcy Pecking Order)
Please give step by step answers
At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the following balance sheet (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. 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.
a.)How much will McDaniel’s shareholders receive from the liquidation?
b.)How much will the mortgage bondholders receive?
c.)Who are the other priority claimants in addition to the mortgage bondholders? How much will they receive from the liquidation?
d.)Who are the remaining general creditors? How much will each receive from the distribution before subordination adjustment? What is the effect of adjusting for subordination?
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 bonds
300
Second-mortgage bonds
200
Debentures
200
Subordinated debentures
100
Common stock
50
Retained earnings
(150)
Total assets
$1,000
Total claims
$1,000
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 bonds
300
Second-mortgage bonds
200
Debentures
200
Subordinated debentures
100
Common stock
50
Retained earnings
(150)
Total assets
$1,000
Total claims
$1,000
Explanation / Answer
Discharge of sale proceeds on priority basis:
Details
Amount
Proceeds:
Sale of Fixed assets
$ 200,000
Sale of current assets
$ 400,000
Total Proceeds
$ 600,000
Discharge:
Trustee’s costs
$ 50,000
Accrued Wages
$ 30,000
First-mortgage bonds
$ 300,000
Second -mortgage bonds
$ 200,000
Debentures
$ 20,000
Total Discharge
$ 600,000
Answers from a through c are based on the above table.
(a)How much will McDaniel’s shareholders receive from the liquidation:
As per liquidation process, proceeds are distributed on priority basis and therefore nothing left for common stockholders.
(b)How much will the mortgage bondholders receive:
First mortgage bondholders and Second mortgage bondholders will receive $300,000 and $200,000 respectively.
(c)Who are the other priority claimants in addition to the mortgage bondholders? How much will they receive from the liquidation:
The next priority claimants after mortgage bondholders are debenture holders and he could receive $20,000 from the liquidation.
(d)Who are the remaining general creditors? How much will each receive from the distribution before subordination adjustment? What is the effect of adjusting for subordination:
The general creditors are listed below but as per the priority basis all the sale proceeds discharged on priority basis and general creditors got nothing left.
Working note:
Details
Amount
Debentures ($200,000 -$20,000)
$ 180,000
Subordinated debentures
$ 100,000
Common stock
$ 50,000
Accrued taxes
$ 40,000
Accounts payable
$ 50,000
Notes payable
$ 180,000
Total of Unadjusted settlements
$ 600,000
Details
Amount
Proceeds:
Sale of Fixed assets
$ 200,000
Sale of current assets
$ 400,000
Total Proceeds
$ 600,000
Discharge:
Trustee’s costs
$ 50,000
Accrued Wages
$ 30,000
First-mortgage bonds
$ 300,000
Second -mortgage bonds
$ 200,000
Debentures
$ 20,000
Total Discharge
$ 600,000
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