Smith Inc is a small manufacturer located in Goobertown, AR. They have come into

Question

Smith Inc is a small manufacturer located in Goobertown, AR. They have come into some bad luck and have decided to file for Chapter 7 Bankruptcy Protection. The Company has assets consisting of cash in the bank of $1,045.12, inventory of $9,227.01, equipment of $298,017.45, and real estate of $565,188.92.

The liabilities of the company include the following: utility bills for $2,003.56, credit card bills for $192,716.28, taxes owed of $201,155.87, a loan from the bank secured by the real estate for $850,000, legal fees of $17,816.08, and back wages for the previous month owed totaling $24,000.

The company has no preferred stock but has 10,000 shares of common stock.

How much will each party receive at the bankruptcy?

Explanation / Answer

The value of total assets of the company is provided as below:

Value of Total Assets = 1,045.12 + 9,227.01 + 298,017.45 + 565,188.02 = $873,477.6

These assets (as and where applicable) will be sold and cash realized will be used to pay off debts in the following order:

Bank = $565,188.92 (equal to the value of real estate). This will completely discharge the liabiity with respect to loan taken from bank.

Employees = $24,000

Taxes Owed = $201,155.87 (assuming taxes other than income tax)

Legal Fees = $17,816.08 (assuming debts incurred after bankruptcy)

The balance amount of $65,316.73 (873,477.6 - 565,188.92 - 24,000 - 201,155.87 - 17,816.08) = $65,316.73 will be allocated on pro-rata basis to credit card and utility bills.

Credit Card Company = 65,316.73*192,716.28/(192,716.28 + 2,003.56) = $64,644.65

Utility Service Provider = 65,316.73*2,003.56/(192,716.28 + 2,003.56) = $672.07

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