Chapter 5: 5DQ (page 524)

Take the following list of securities and arrange them in order of their priority of claims: (LO16-1)
Preferred stock Senior debenture
Subordinated debenture Senior secured debt
Common stock Junior secured debt

Short Answer

Expert verified

According to the priority of claims, secured debts are settled first, and then other claims are paid.

Step by step solution

Funds

Funds refer to the pool of money collected by the corporations to function their business operations. The primary sources of funds collection are the issuance of stocksand bonds.

Order of claims’ settlement

The order of settling the claims according to the priority should be:

Senior secured debt
Junior secured debt
Senior debenture
Subordinate debenture
Preferred stock
Common stock

According to the settlement of claims order, those categories should be paid first with which assets are pledged.

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Bailey corporation
Income statement
For the year 20X1
Sales (all on credit)	\(42,680,000
Cost of goods sold	\)32,240,000
Gross profit	\(10,440,000
Selling and administrative expenses	\)4,558,000
Operating profit	\(5,882,000
Interest expense	\)600,000
Net income before taxes	\(5,282,000
Taxes	\)2,120,000
Net income	\(3,162,000

Bailey corporation
Balance sheet
As of December 31, 20X1
Assets
Current assets:
Cash	\)250,000
Marketable securities	\(130,000
Accounts receivables	\)6,000,000
Inventory	\(8,300,000
Total current assets	\)14,680,000
Net plant and equipment	\(13,970,000
Total assets	\)28,650,000
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	\(3,800,000
Notes payable	\)3,550,000
Total current liabilities	\(7,350,000
Long-term liabilities	\)5,620,000
Total liabilities	\(12,970,000
Stockholder’s equity:
Common stock (1,800,000 shares at \)1 par)	\(1,800,000
Capital in excess of par	\)6,300,000
Retained earnings	\(7,580,000
Total stockholder’s equity	\)15,680,000
Total liabilities and stockholder’s equity	$28,650,000

Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	$8,500,000

Take the following list of securities and arrange them in order of their priority of claims: (LO16-1)
Preferred stock Senior debenture
Subordinated debenture Senior secured debt
Common stock Junior secured debt

Short Answer

Step by step solution

Funds

Order of claims’ settlement

One App. One Place for Learning.

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Take the following list of securities and arrange them in order of their priority of claims: (LO16-1)Preferred stock Senior debentureSubordinated debenture Senior secured debtCommon stock Junior secured debt

Short Answer

Step by step solution

Funds

Order of claims’ settlement

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Business Operations

Managers

Introduction to Business

Organizational Communication

Intermediate Accounting

Managerial Economics

Study anywhere. Anytime. Across all devices.

Take the following list of securities and arrange them in order of their priority of claims: (LO16-1)
Preferred stock Senior debenture
Subordinated debenture Senior secured debt
Common stock Junior secured debt