Chapter 5: Q1Pd. (page 451)

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 the 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.

$Value left = Value of assets after deducting administrative costs - Liquidation value of machinery and equipment = $ 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

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

Short Answer

Step by step solution

Information provided in the 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