Patricia\'s Paddle Boats is to be liquidated. All creditors, both secured and un
ID: 2716227 • Letter: P
Question
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 secured creditors receive, in total?
a. $900,000; 47.37%
b. $1,250,000; 65.79%
c. 1,627,777; 85.67%
d. $1,900,000; 100%
e. Not enough information to answer.
Explanation / Answer
Answer: c. 1,627,777; 85.67%
Calculation of the claim that the secured creditors will receive, in total:
Mortgage unsecured = $1,900,000 - $1200,000 = $700,000
Net proceeds remaining = $2500,000 - $1200,000 - $750,000 = $550,000
Mortgage unsecured payment = ($700,000/$900,000)($550,000) = $427777
Total mortgage proceeds = $1200,000 +$427777= $1627777
% received = $1627777/$1,900,000 = 85.67%.