A company preparing for a Chapter 7 liquidation has the following liabilities: •

Question

A company preparing for a Chapter 7 liquidation has the following liabilities:

• Note payable A of $98,000 secured by land having a book value of $54,000 and a fair value of $74,000.

• Note payable B of $128,000 secured by a building having a $64,000 book value and a $44,000 fair value.

• Note payable C of $64,000, unsecured.

• Administrative expenses payable of $24,000.

• Accounts payable of $124,000.

• Income taxes payable of $34,000.

The company also has these other assets:

• Cash of $14,000.

• Inventory of $108,000 but with fair value of $64,000.

• Equipment of $98,000 but with fair value of $54,000.

How much will each of the company's liabilities be paid at liquidation?

Payment on Note payable A?

Payment on Note payable B?

Payment on Note payable C?

Payment on Administrative expenses?

Payment on Accounts payable?

Payment on Note payable?

Payment on income taxes payable?

Explanation / Answer

Answer: Total free assets available Cash $             14,000.00 Inventory $             64,000.00 Equipment $             54,000.00 Total free assets $          1,32,000.00 Sum of all above Total liabilities with Priority Administrative expenses $             24,000.00 Income taxes $             34,000.00 Total liabilities with Priority $             58,000.00 Sum of all above Free assets after payment of liability with priority Total free assets $          1,32,000.00 Less: Total liabilities with Priority $             58,000.00 Free asset after payment of priority liabilitiy $             74,000.00 (132,000-58,000) Unsecured Liabilitiy Note A (in excess of fair value of security) $             24,000.00 Note B (in excess of fair value of security) $             84,000.00 Note C $             64,000.00 Accounts payable $          1,24,000.00 Total unsecured liability $          2,96,000.00 Sum of all above Percentage of unsecured liability to be paid would be 25% ($74,000/296,000) Payment of Note payable A $             80,000.00 (74000+25%*(98000-74000)) Payment of Note payable B $             65,000.00 (44000+25%*(128000-44000)) Payment of Note payable C $             16,000.00 (25%*64000) Payment of administrative expenses $             24,000.00 Payment of Accounts payable $             31,000.00 (25%*124000) Payment of income tax payable $             34,000.00

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