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    Bankruptcy Claims Allocation

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    At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the following balance sheet (in thousands of dollars). The court, after trying unsuccessfully to reorganize the firm, decided that the only recourse was liquidation under Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $400,000, while the current assets were sold for another $200,000. Thus, the total proceeds from the liquidation sale were $600,000. Trustee's costs amounted to $50,000; no single worker was due more than $2,000 in wages; and there were not unfunded pension plan liabilities.

    A. How much will McDaniel's shareholders receive from the liquidation?

    B. How much will the mortgage bondholders receive?

    C. Who are the other priority claimants in addition to the mortgage bondholders? How much will they receive from the liquidation?

    D. Who are the remaining general creditors? How much will each receive from the distribution before subordination adjustment? What is the effect of adjusting for subordination?

    Textbook Answers:
    A. $0
    B. 1st mortgage holder: $300,000, 2nd Holder: $100,000 plus $12,700 as general claimant.
    C. Trustee expenses: $50,000; Wages due: $30,000; Taxes Due: $40,000
    D. Before subordination:
    Accts Payable $6,350; Notes Payable $22,860; 2nd mortgage $12,700+$100,000. Debentures $25,400; Sub. Debenture $12,700

    After Subordination:
    Notes Payable: $35,560
    Sub. Debentures: $0

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    Solution Summary

    The solution allocates amounts received in bankruptcy as per priority claims.