Patricia's Paddle Boats is to be liquidated. All creditors,both secured and unsecured,are owed $2,100,000. Administrative costs of liquidation and wage payments are expected to be $750,000. A sale of assets is expected to bring $2,500,000 after taxes. Secured creditors have a mortgage lien for $1,900,000 on the factory which will be liquidated for $1,200,000 out of the sale proceeds. The corporate tax rate is 40%. How much and what percentage of their claim will the unsecured creditors receive,in total?

Question

Quizplus · Accepted Answer

1. Sale of assets will bring $2,500,000 after taxes, out of which administrative and wage payment costs will be $750,000. Therefore, the remaining amount available for the creditors is:

$2,500,000 - $750,000 = $1,750,000

2. Secured creditors have a mortgage lien of $1,900,000 on the factory, but the factory will be liquidated for $1,200,000 only. Therefore, the secured creditors will receive:

$1,200,000 - $0 (for taxes) = $1,200,000

3. The remaining amount available for the unsecured creditors is:

$1,750,000 - $1,200,000 = $550,000

4. The corporate tax rate is 40%, which means that the taxes on the sale of assets will be:

$2,500,000 x 0.4 = $1,000,000

5. Therefore, the total amount available for the creditors (secured and unsecured) is:

$2,500,000 - $1,000,000 - $750,000 = $750,000

6. The amount that the unsecured creditors will receive is:

$750,000 - $1,200,000 = -$450,000 (this is a negative number which means that the unsecured creditors will not receive anything)

7. However, the question asks for the percentage of the total claim that the unsecured creditors will receive. The total claim is $2,100,000, and the secured creditors will receive $1,200,000. Therefore, the unsecured creditors' claim is:

$2,100,000 - $1,200,000 = $900,000

8. Since the unsecured creditors will not receive anything, their percentage of the total claim is:

0%

9. The only answer choice that matches this calculation is B.

Patricia's Paddle Boats Is to Be Liquidated