Southwestern Wear Inc. has the following balance sheet: The trustee\'s costs tot

Question

Southwestern Wear Inc. has the following balance sheet:

The trustee's costs total $267,750, 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 $4 million is received from sale of the assets?

Distribution of proceeds on liquidation:

Distribution to general creditors:

The remaining $   will go to the common stockholders.

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

Explanation / Answer

Cash to be distributed = $4 million - 267,750 = 3,732,250

Distribution:
1. Accounts payable creditor = 375,000
2. Notes payable creditor = 750,000
3. Subordinated debentures creditor = 750,000
4. Common equity holders = 3,732,250 - 375,000 - 750,000 - 750,000 = $1,857,250

Distribution to general creditors:

The remaining $1,857,250   will go to the common stockholders.

Claims of
General
Creditors

Claim
(1)
Application of 100%
Distribution
(2) After
Subordination
Adjustment
(3)
Percentage of
Original Claims Received
(4) Notes payable $375,000    $375,000    $ 0 100% Accounts payable $750,000 $750,000   $ 0 100% Subordinated debentures $750,000 $750,000   $ 0 100% Total $1,875,000 $1,875,000     $ 0

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