32. A company preparing for a Chapter 7 liquidation has the following liabilitie

Question

32. A company preparing for a Chapter 7 liquidation has the following liabilities: Note payable A of $90,000 secured by land having a book value of $50,000 andad of $70,000. . Note payable B of $120,000 secured by a building having a S60,000 book value and $40,000 fair value. Note payable C of $60,000, unsecured. Administrative expenses payable of $20,000. Accounts payable of $120,000. . Income taxes payable of $30,000 The company also has these other assets: Cash of $10,000. Inventory of $100,000 but with fair value of $60,000. Equipment of $90,000 but with fair value of $50,000. . How much will each of the company's liabilities be paid at liquidation?

Explanation / Answer

Step 1: Calculate Total Fair Market Value of Free Assets

The total fair market value of free assets is calculated as below:

_____

Step 2: Determine the Amount of Each of the Company's Liabilities Paid at Liquidation

We will first pay the liabilities with priority as follows:

Administrative Expenses Payable = $20,000

Income Tax Payable = $30,000

The remaining balance of $70,000 (120,000 - 20,000 - 30,000) will be used the pay off the unsecured liabilities. We will have to calculate the value of total unsecured liabilities and percentage of unsecured liabilities to be paid as below:

Now, we can calculate the value of unsecured liabilities that will be paid off at the time of liquidation as follows:

Payment on Note Payable A = 20,000*25% = $5,000

Payment on Note Payable B = 80,000*25% = $20,000

Payment on Note Payable C = 60,000*25% = $15,000

Payment on Accounts Payable = 120,000*25% = $30,000

_______

Tabular Representation:

Cash 10,000 Inventory 60,000 Equipment 50,000 Total Fair Market Value of Free Assets $120,000

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