Tundra Tots is being liquidated under Chapter 7 of the Bankruptcy Act. Its curre
ID: 2641055 • Letter: T
Question
Tundra Tots is being liquidated under Chapter 7 of the Bankruptcy Act. Its current balance sheet is shown below. Fixed assets are sold for $25,000,000 and current assets are sold for $18,000,000. All fixed assets are pledged as collateral for all mortgage bonds. Subordinated debentures are subordinate only to notes payable. Trustee costs are $500,000. No employee is owed over $2,000.
Sale of current assets 18,000,000 Sale of fixed assets 25,000,000 Trustee costs 500,000 Before Before Default Balance Sheet Default Current Assets 75,000,000 Accounts payable 15,000,000 Net fixed assets 50,000,000 Accrued taxes 10,000 Accrued wages 550,000 Notes payable 3,800,000 Total current liabilities 19,360,000 First-mortgage bonds 18,000,000 Second-mortgage bonds 20,000,000 Debentures 45,000,000 Subordinated debentures 14,000,000 Common stock 2,500,000 Retained earnings 6,140,000 Total assets 125,000,000 Total claims 125,000,000 a. How much will SHs receive? b. How much will mortgage bondholders receive? c. How much will priority creditors receive?Explanation / Answer
Working Notes
Step 1
The mortgage bondholders have priority claim against the proceeds from the sale of pledged property. Thus, the $25,000,000 from the fixed assets must first be distributed to the first and second mortgage bondholders. The first mortgage holders receive their full claim of $18,000,000, while the second mortgage holders receive the remaining $7,000,000. This constitutes the total $25,00,000, so none of the proceeds from the sale of pledged assets are available for distribution to general creditors. Additionally, the second mortgage holders have $13,000,000 in unsatisfied claims which become general creditor claims.
Step 2
The priority claimants are the mortgage bondholders, trustee, workers, and government. The remaining claimants are general creditors. There is $18,000,000 available after the $25,000,000 distribution to the mortgage bondholders. This is distributed to the remaining priority claimants as follows:
Claimant Amount
Trustee's expenses $ 500,000
Workers' wages due 550,000
Governments' taxes due 10,000
Total $10,60,000
Step 3
Of the total $43,000,000 received from the liquidation, $250,10,000 has been distributed to priority claimants. This leaves $17,990,000 to distribute to the general creditors. But the general creditor claims total $90,800,000:
Account Claim
Accounts payable $ 15,000,000
Notes payable 3,800,000
Second mortgage bonds 13,000,000
Debentures 45,000,000
Subordinated debentures 14,000,000
Total $90,800,000
Step 4
Note that the second mortgage holders' unsatisfied claim of $13,000,000 is included. Each claimant, before subordination adjustment, would receive $17,990,000/$90,800,000 = 0.19813 of his or her claim. Therefore, the general creditors would receive:
Account Calculation Amount Received ($)
Accounts payable 0.19813 x 15000000 2971950
Notes payable 0.19813 x 3800000 752690
Second mortgage bonds 0.19813 x 13000000 2575690
Debentures 0.19813 x 45000000 8915850
Subordinated debentures 0.19813 x 14000000 2773820
Total $ 17,990,000
Step 5
Therefore Mortgage bondholders will recieve :
First Mortgage $18,000,000
Second Mortgage 7,000,000
Second Mortgage 2,575,690 (as general creditor)
Total $ 27,575,690
Answers to the questions:
a) the Shareholders will receive nothing as their clain is the residual claim and after satsfying the claim of the creditors, the company will have nothing left to distribute to the shareholders
b) The mortgage bobdholders will receive $27,575,690 (step 5)
c) The priority creditors will receive $1060000 + $27575690 = $28,635,690
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