Magic Mobile Homes is to be liquidated. All creditors,both secured and unsecured,are owed $2 million. Administrative costs of liquidation and wage payments are expected to be $500,000. A sale of assets is expected to bring $1.8 million after taxes. Secured creditors have a mortgage lien for $1,200,000 on the factory which will be liquidated for $900,000 out of the sale proceeds. The corporate tax rate is 34%. How much and what percentage of their claim will the unsecured creditors receive,in total?

Question

Quizplus · Accepted Answer

The total amount available for distribution to creditors is:
Sale proceeds after taxes - Administrative costs - Secured creditors' claim = $1.8m - 34% of $500k - $900k = $290,000
The unsecured creditors are owed $2m - $900k (paid to secured creditors) = $1.1m
Therefore, the percentage of their claim that the unsecured creditors will receive is ($290,000 / $1.1m) x 100% = 26.36%
Each unsecured creditor will receive $1.1m x 26.36% = $290,909, which is the amount and percentage in option B.

Magic Mobile Homes Is to Be Liquidated