Question

The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.

Assets
	Book value	Liquidation value
Accounts receivables	\(1,400,000	\)1,200,000
Inventory	\(1,800,000	\)900,000
Machinery and equipment	\(1,100,000	\)600,000
Building and plant	\(4,200,000	\)2,500,000
Total assets	\(8,500,000	\)5,200,000

Liabilities and stockholder’s claims
Liabilities
Accounts payable	\(2,800,000
First lien, secured by machinery and equipment	\)900,000
Senior unsecured debt	\(2,200,000
Subordinated debenture	\)1,700,000
Total liabilities	\(7,600,000
Stockholder’s claims
Preferred stock	\)250,000
Common stock	\(650,000
Total stockholder’s claims	\)900,000
Total liabilities and stockholder’s claims	\(8,500,000

c. Assuming the administrative costs of bankruptcy, workers’ allowable wages, and unpaid taxes add up to \)400,000, what is the total remaining asset value available to cover secured and unsecured claims?

Short answer

The total remaining asset value left for covering claims is $4,800,000.

Step-by-step solution

Information provided in the question

Total liquidation value of assets = $5,200,000

Total liquidation value of liabilities = $7,600,000

Administrative costs and unpaid taxes = $400,000

Calculation of asset value left for deducting claims

The asset value left is $4,800,000.

$$\begin{gathered} \text{Value left}=\text{Liquidation value of assets}-\text{Administrative costs and unpaid taxes} \\ =\$5,200,000-\$400,000 \\ =\$4,800,000 \end{gathered}$$