Question

A company preparing for a Chapter 7 liquidation has the following liabilities:

• Note payable A of $102,000 secured by land having a book value of $56,000 and a fair value of $76,000.
• Note payable B of $132,000 secured by a building having a $66,000 book value and a $46,000 fair value.
• Note payable C of $66,000, unsecured.
• Administrative expenses payable of $26,000.
• Accounts payable of $126,000.
• Income taxes payable of $36,000.

The company also has these other assets:

• Cash of $16,000.
• Inventory of $112,000 but with a net realizable value of $66,000.
• Equipment of $102,000 but with a net realizable value of $56,000.

How much will each of the company's liabilities be paid at liquidation?

Answer 1

Ans- The money available for liabilities at the time of liquidation is calculated below:-

Assets	Amount ($)	Amount ($)
Free Assets:-
Cash	160,000
Inventory	66,000
Equipment	56,000
Total Assets		282,000
Liability with priority
Less: Administrative expenses	(26,000)
Income tax payable	(36,000)	(62,000)
Balance assets		220,000
Free assets after payment of liabilities with priority		220,000
Unsecured liabilities:-
Notes payable A (in excess of value of security)	26,000
Notes payable B (in excess of value of security)	86,000
Notes payable C	66,000
Accounts payable	126,000
Total		304,000

Percentage of secured liabilities to be paid:-

Percentage of unsecured liabilities =$76,000/ $304,000= 25%

The payment made for different liabilities at the time of liquidation is calculated below:-

Calculate payments on note payable A

Notes payable A = Value of security (land)+25% of remaining $26,000

=$76,000+(25% * $26,000)

=$76,000+6,500

=$82,500

Calculate payment on note payable B

Notes payable B=Value of security (building)+ 25% of remaining $86,000

=$46,000+(25% *86,000)

=$46,000+$21,500

=$67,500

Calculate payment on notes payable C (unsecured)

Notes payable C=25% of remaining $66,000

=$16,500

Calculate payment on accounts payable (unsecured)

Accounts payable = 25% of accounts payable amount

=25% *$126,000

=$31,500

The income tax expenses and administrative expenses are liability with priority so their complete amount will be paid.