Chapter 13, Problem 31P

A statement of financial affairs created for an insolvent corporation that is beginning the process of liquidation discloses the following data (assets are shown at net realizable values):

Assets pledged with fully secured creditors . . . . . . . . . . . . . . . . . . .	$220,000
Fully secured liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	160,000
Assets pledged with partially secured creditors . . . . . . . . . . . . . . .	390,000
Partially secured liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	510,000
Assets not pledged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	310,000
Unsecured liabilities with priority . . . . . . . . . . . . . . . . . . . . . . . . . . . .	182,800
Accounts payable (unsecured) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	400,000

1. a. This company owes $13,000 to an unsecured creditor (without priority). How much money can this creditor expect to collect?
2. b. This company owes $120,000 to a bank on a note payable that is secured by a security interest attached to property with an estimated net realizable value of $90,000. How much money can this bank expect to collect?

To determine

Find how much money this creditor can expect to collect.

Explanation of Solution

Computation of the amount which the creditor can expect to collect:

$\begin{array}{c}\text{Amount}\text{that}\text{creditor}\text{expected}\text{to}\text{collect}\text{=}\left(\begin{array}{l}\text{Unsecured}\text{Creditors}\text{×}\text{Percentage}\text{to}\text{distribute}\\ \text{to}\text{unsecured}\text{creditors}\end{array}\right)\\ =\left(\$13,000\times 35\%\right)\\ =\$4,550\end{array}$

Working note:

Computation of available amount of assets:

$\begin{array}{c}\text{Amount}\text{available}=\left(\begin{array}{l}\text{Assets}\text{not}\text{pledged}\text{+}\text{Assets}\text{pledged}\text{with}\text{fully}\text{ecured}\text{creditors}\\ -\text{Fully}\text{secured}\text{liabilities}\end{array}\right)\\ =\$310,000+\$220,000-\$160,000\\ =\$370,000\end{array}$ (1)

Computation of amount for unsecured creditors:

$\begin{array}{c}\text{Amount}\text{available}\text{=}\text{Total}\text{amount}\text{available}-\text{Unsecured}\text{Liabilities}\text{with}\text{priority}\\ =\$370,000-\$182,800\\ =\$187,200\end{array}$ (2)

Computation of total unsecured liabilities:

$\begin{array}{c}\text{Unsecured}\text{liabilities}\text{=}\text{Accounts}\text{payable}+\left(\begin{array}{l}\text{Partially}\text{secured}\text{laibilities}-\text{Assets}\text{pledged}\\ \text{with}\text{partially}\text{secured}\text{creditors}\end{array}\right)\\ =\$400,000+\left(\$510,000-\$390,000\right)\\ =\$530,000\end{array}$ (3)

Computation of percentage for unsecured creditors:

$\begin{array}{c}\text{Percentage}\text{=}\frac{\text{Amount}\text{available}\text{for}\text{unsecured}\text{creditors}}{\text{Unsecured}\text{liabilities}}\\ \text{=}\frac{\text{\$187,200}}{\text{\$530,000}}\\ =35\%\end{array}$ (4)

To determine

Find how much money this bank can expect to collect.

Explanation of Solution

Computation of the amount which the bank can expect to collect:

$\begin{array}{c}\text{Amount}\text{expected}\text{by}\text{bank}=\left(\begin{array}{l}\text{NRV}+\left(\text{Total}\text{amount}\text{due}-\text{NRV}\right)\\ \times \text{Percentage}\text{for}\text{unsecured}\text{creditors}\end{array}\right)\\ =\$80,000+\left(\$100,000-\$80,000\right)\times 38\%\\ =\$80,000+\$7,600\\ =\$87,600\end{array}$