4. A firm’s balance sheet is given below. Liquidation bankruptcy has been initia
ID: 2824515 • Letter: 4
Question
4. A firm’s balance sheet is given below. Liquidation bankruptcy has been initiated, and the cost of administering the bankruptcy proceedings is $50,000. The mortgage bonds were secured by the equipment, and the equipment sold for $350,000. All other assets sold for $308,000. Distribute the $658,000 in asset liquidation proceeds.
Current Assets $ 60,000 Accounts Payable $ 120,000
Equipment 100,000 Wages Payable 150,000
Plant & Property 840,000 Taxes Payable 140,000
Mortgage Bonds 300,000
Preferred Stock 50,000
Common Stock 150,000
Retained Earnings 90,000
Total $1,000,000 Total $1,000,000
Explanation / Answer
In the asset liquidation process, the assets are distributed on the basis of priority of claims. The first in line is the liquidator's fees for administering the bankruptcy proceedings which is $50,000. Amount remaining is $608,000. The second in line are the secured creditors. Here mortgage bonds have been secured by equipment which has fetched $350,000. Therefore mortgage bondholders are being paid off $300,000. Amount remaining is $308,000. Next in line are the unsecured creditors. They will be paid off proportionately on the basis of amount due. They will be paid as follows:
Accounts payable: 120,000/410,000 x 308,000 = $90,146
Wages payable: 150,000/410,000 x 308,000 = $112,683
Taxes payable: 140,000/410,000 x 308,000 = $105,171
The remaining amount which has fallen short will have to be written off by them as bad debts or irrecoverable debts.
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