4 A firms balance sheet is given below Liquidation bankruptc

4.   A firm’s balance sheet is given below. Liquidation bankruptcy has been initiated, and the cost of administering the bankruptcy proceedings is $50,000. The mortgage bonds were secured by the equipment, and the equipment sold for $350,000. All other assets sold for $308,000. Distribute the $658,000 in asset liquidation proceeds.

Current Assets       $   60,000 Accounts Payable       $ 120,000

Equipment             100,000 Wages Payable         150,000   

Plant & Property         840,000 Taxes Payable         140,000

Mortgage Bonds         300,000

Preferred Stock          50,000

Common Stock         150,000

Retained Earnings 90,000

Total               $1,000,000 Total               $1,000,000

Solution

In the asset liquidation process, the assets are distributed on the basis of priority of claims. The first in line is the liquidator\'s fees for administering the bankruptcy proceedings which is $50,000. Amount remaining is $608,000. The second in line are the secured creditors. Here mortgage bonds have been secured by equipment which has fetched $350,000. Therefore mortgage bondholders are being paid off $300,000. Amount remaining is $308,000. Next in line are the unsecured creditors. They will be paid off proportionately on the basis of amount due. They will be paid as follows:

Accounts payable: 120,000/410,000 x 308,000 = $90,146

Wages payable: 150,000/410,000 x 308,000 = $112,683

Taxes payable: 140,000/410,000 x 308,000 = $105,171

The remaining amount which has fallen short will have to be written off by them as bad debts or irrecoverable debts.