A company preparing for a Chapter 7 liquidation has the following liabilities: N

Question

A company preparing for a Chapter 7 liquidation has the following liabilities: Note payable A of $124,000 secured by land having a book value of $67,000 and a fair value of $87,000. Note payable B of $154,000 secured by a building having a $77,000 book value and a $57,000 fair value. Note payable C of $77,000, unsecured. Administrative expenses payable of $37,000 Accounts payable of $137,000. Income taxes payable of $47,000. The company also has these other assets Cash of $27,000. Inventory of $134,000 but with fair value of $77,000 Equipment of $124,000 but with fair value of $67,000. How much will each of the company's liabilities be paid at liquidation? Amount Payment on note payable A Payment on note payable B Payment on note payable C Payment on administrative expenses Payment on accounts payable Payment on income taxes payable

Explanation / Answer

Free Assets Cash      27,000.00 Inventory      77,000.00 Equipment      67,000.00 Total Free Assets    171,000.00 Less: Liabilities With Priority Administrative Expenses      37,000.00 Income Tax Payable      47,000.00 Total Liabilities With Priority      84,000.00 Free Assets after Payment of Liabilities with Priority      87,000.00 Unsecured Liabilities In excess of Value of security Notes Payable A ($124,000 - $87,000)      37,000.00 Notes Payable B ($154,000 - $57,000)      97,000.00 Uunsecured Creditors Notes Payable C      77,000.00 Accounts Payable    137,000.00 Total Unsecured Liabilities    348,000.00 Percentage of Unsecured Liabilities To Be Paid = $87,000 / $348,000 Percentage of Unsecured Liabilities To Be Paid = 25% Amount Paid at the Time of Liquidation: Note Payable A = $87,000 + ($37,000 X 25%)      96,250.00 Note Payable B = $57,000 + ($97,000 X 25%)      81,250.00 Note Payable C = $77,000 X 25%      19,250.00 Administrative Expenses      37,000.00 Accounts Payable - $137,000 X 25%      34,250.00 Income Tax Payable      47,000.00

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