Chapter 5: Q A-1P-d (page 538)

Question: The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.
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
d. After the machinery and equipment are sold to partially cover the first lien secured claim, how much will be available from the remaining asset liquidation values to cover unsatisfied secured claims and unsecured debt?

Short Answer

Expert verified

The asset value left after machinery and equipment is sold to partially cover first lien is $4,200,000.

Step by step solution

Information provided in question

Total liquidation value of assets = $5,200,000

Total liquidation value of liabilities = $7,600,000

Liquidation value of machinery and equipment = $600,000

Liquidation value of asset left after deducting administrative costs = $4,800,000

Calculation of asset value left after deducting liquidation value of first lien machinery and equipment

The asset value left is $4,200,000.

$V a l u e l e f t = V a l u e o f a s s e t s a f t e r d e d u c t i n g a d m i n i s t r a t i v e \cos t s - L i q u i d a t i o n v a l u e o f m a c h i n e r y a n d e q u i p m e n t = $ 4, 800, 000 - $ 600, 000 = $ 4, 200, 000$

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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

In \( millions	In \) millions
Current assets	\(70	Current liabilities	\)30
Fixed assets	\(70	Long-term liabilities	\)30
		Total liabilities	\(60
		Stockholder’s equity	\)80
Total assets	\(140	Total stockholder’s equity and liabilities	\)140

Short Answer

Step by step solution

Information provided in question

Calculation of asset value left after deducting liquidation value of first lien machinery and equipment

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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