The Walston Company is to be liquidated and has the following liabilities: Incom

Question

The Walston Company is to be liquidated and has the following liabilities: Income taxes Notes payable (secured by land) Accounts payable Salaries payable (evenly divided between two employees) Bonds payable Administrative expenses for liquidation $7,000 130,000 90,000 11,000 75,000 25,000 The company has the following assets: Current assets Land Buildings and equipment Book Value Fair Value $ 85,000 $ 40,000 95,000 127,000 105,000 105,000 How much money will the holders of the notes payable collect following liquidation? Total amount collected

Explanation / Answer

Money will the holders of the notes payable collect following the liquidation = $ 1,11,700

Workings

Free assets = Current assets + Building and equipments

                 = $ 40000 + $ 127000 = $ 167000

Liabilities with priority = Administrative expenses + Salaries payable (only $5500 per employee) + Income taxes

                                      = $ 25000 +          $ 11000 + $ 7000

                                      = $ 43000

Free assets after payment of liabilities with priority = $ 1,24,000

($167000 - $43000)

Unsecured liabilities = Notes payable (in excess of value of security) + Accounts payable + Bonds payable

                             = $ 35000 + $ 90000 + $ 75000

                             = $ 2,00,000

Percentage of unsecured liabilities to be paid: $124000 / $ 200000 = 62%

Payment on notes payable

          = Value of security (land) + 62% of remaining $35,000

          = $ 90000 + $ 21700

          = $ 1,11,700

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