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

a. Compute the difference between the liquidation value of the assets and the liabilities.

Short answer

The difference between liquidation value of assets and liabilities is -$2,400,000.

Step-by-step solution

Calculation of liquidation value of assets

The total liquidation value of assets is $5,200,000

Particulars	Liquidation value
Accounts receivables	$1,200,000
Inventory	$900,000
Machinery and equipment	$600,000
Building and plant	$2,500,000
Total assets	$5,200,000

Calculation of liquidation value of liabilities

The total liquidation value of liabilities is $7,600,000

Liabilities
Accounts payable	$2,800,000
First lien, secured by machinery and equipment	$900,000
Senior secured debt	$2,200,000
Subordinated debenture	$1,700,000
Total liabilities	$7,600,000

Calculation of difference between liquidation value of assets and liabilities

The difference between the liquidation value of assets and liabilities is -$2,400,000.

$\begin{array}{rcl}Difference& =& Liquidationvalueofassets-Liquidationvalueofliabilities\\ & =& \$5,200,000-\$7,600,000\\ & =& -\$2,400,000\end{array}$