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

b. Based on the answer to part a, will preferred stock or common stock participate in the distribution?

Short answer

The stockholders will not participate in the distribution process as the organization has to first discharge its liabilities.

Step-by-step solution

Meaning of liquidation process

The liquidation process involves selling the organization’s assets to generate cash and utilizing that cash for discharging the liabilities of the organization. This process is undertaken at the time of shutting down the organization.

 Step 2: Stockholder’s claim to the liquidation value of assets

The stockholders do not make claims against the liquidation value of assets as the stockholders are only paid after settling all the liabilities of the organization. The stockholders cannot make claim against the organization’s assets before other creditors.