At the time it defaulted on its interest payments and filed for bankruptcy, Medford Fabricators Inc. had the following balance sheet (in millions 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 $750 million, while the current assets were sold for another $400 million. Thus, the total proceeds from the liquidation sale were $1,150 million. Trustee’s costs amounted to $1 million; no single worker was due more than $2,000 in wages; and there were no unfunded pension plan liabilities.

a. How much of the proceeds from the sale of assets remain to be distributed to general creditors after distribution to priority claimants?
b. After distribution to general creditors and subordination adjustments are made, how much of the proceeds are received by the second mortgage holders? By holders of the notes payable? By the subordinated debentures? By the common stockholders?

Transcribed Image Text:

Current assets Net fixed assets $ 800 1,100 $1,900 Accounts payable Accrued taxes Accrued wages Notes payable Total current liabilities First-mortgage bondsa Second-mortgage bondsa Debentures Subordinated debenturesb Common stock Retained earnings Total claims Total assets Notes: "All fixed assets are pledged as collateral to the mortgage bonds. Subordinated to notes payable. $ 100 90 60 300 $ 550 700 400 500 200 100 (550) $1,900