The B.O. Drug Company is to be liquidated. Its liquidating value is $2.7 million. Bonds worth $1.5 million are secured by a mortgage on the B.O. Drug Company corporate headquarters building, which is sold for $1 million; $200,000 is used to cover administrative costs and other claims (including unpaid wages, pension benefits, consumer claims, and taxes). After paying $200,000 to the administrative priority claims, the amount available to pay secured and unsecured creditors is $2.5 million. This is less than the amount of unpaid debt of $4 million.

Under APR, all creditors must be paid before shareholders, and the mortgage bondholders have first claim on the $1 million obtained from the sale of the headquarters building.

The trustee has proposed the following distribution:

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Type of Claim Bonds (secured by mortgage) Subordinated debentures Common stockholders Total Calculation of the Distribution Cash received from sale of assets available for distribution Cash paid to secured bondholders on sale of mortgaged property Available to bond and debenture holders Total claims remaining ($4,000,000 less payment of $1,000,000 on secured bonds) Distribution of remaining $1,500,000 to cover total remaining claims of $3,000,000 Type of Claim Remaining Prior Claim $ 1,500,000 2,500,000 10,000,000 $14,000,000 Bonds Debentures Total Claim on Liquidation Proceeds $ 500,000 2,500,000 $3,000,000 Cash Received under Liquidation $1,500,000 1,000,000 0 $2,500,000 $2,500,000 1,000,000 $1,500,000 $3,000,000 Cash Received $ 500,000 1,000,000 $1,500,000