What would be the priority of the claims as to the distribution of assets in a l

Question

What would be the priority of the claims as to the distribution of assets in a liquidation under Chapter 7 of the Bankruptcy Act? 1 is the highest claim, 5 is the lowest.

(1) Trustees' costs to administer and operate the firm.
(2) Common stockholders.
(3) General, or unsecured, creditors.
(4) Secured creditors, who have a claim to the proceeds from the sale of specific property pledged to secure a loan.
(5) Taxes due to federal and state governments.

a. 1, 4, 3, 5, 2
b. 5, 4, 1, 3, 2
c. 4, 1, 5, 3, 2
d. 5, 1, 4, 2, 3
e. 1, 5, 4, 3, 2
Show your work.

Explanation / Answer

The distribution of assets in a liquidation under Chapter 7 is governed by the following priority of claims:

(Ehrhardt & Brigham, 2011, 2009)

References

Ehrhardt, M. C., & Brigham, E. F. (2011, 2009). Financial Management: Theory and Practice. Mason, OH: Cengage Learning.

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