25-4 Why do liquidations usually result in losses for the creditors or the owner

Question

25-4 Why do liquidations usually result in losses for the creditors or the owners or both? Would partial liquidation or liquidation over a period limit their losses? Explain. 25-5 Are liquidations likely to be more common for public utility, railroad, or industrial corporations? Why? Problems Answers Appear in AppendixB Easy Problem 1 25-1 Liquidation Southwestern Wear Inc. has the following balance sheet: Current assets $1,875,000 Accounts payable Fixed assets 1,875,000 Notes payable s 375,000 750,000 Subordinated debentures 750,000 $1,875,000 1,875,000 3,750000 Total libilities and equity $3,750,000 The trustee's costs total $281,250, and the firm has no accrued taxes or w The debentures are subordinated only to the notes payable. If the firm Total debt Common equity Total assets ages. goes receive if a bankrupt and liquidates, how much will each class of investors receive i sale of the assets?

Explanation / Answer

Answer: Amount Proceeds=$2500000

Payment to stockholdes= Amount proceeds - (payment to accounts payable + Payment to notes payable + Payment to subordinate deb + Payment to trustee cost)

=2500000-(375000+750000+750000+281250)

=343750

So, Account Payable=$375,000;

Notes Payable=$750,000;

Subordinated Debenture=$750,000;

Stockholders=$343,750

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