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

g. List the remaining claims (unsatisfied secured and unsecured) and make an initial allocation and final allocation similar to that shown in Table 16A-4. Subordinated debenture holders may keep the balance after full payment is made to senior debt holders.

Step by step solution

01

Information provided in question

Total liquidation value of assets left after deducting administrative costs, unpaid taxes, and satisfying first lien = $4,200,000

Total liquidation value of liabilities after partial cover of first lien = $7,000,000

Allocation ratio = 60%

02

 Step 2: Table showing allocation of remaining claims

The total claims allocated is $4,200,000.

Category	Amount of claim	Initial allocation (60%)	Amount received
Unsatisfied secured debt	$300,000	$180,000	$180,000
Accounts payable	$2,800,000	$1,680,000	$1,680,000
Senior unsecured debt	$2,200,000	$1,320,000	$2,200,000
Subordinated debenture	$1,700,000	$1,020,000	$140,000
Total liabilities	$7,000,000	$4,200,000	$4,200,000

The senior unsecured debt is paid in full by deducting the remaining amount from the money allocated to the subordinated debentures

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