Problem #5: At the time it defaulted on its interest payments and filed for bankruptcy, the Patton Pharmaceuticals had the following balance sheet (in thousands of US dollars). The court, after trying unsuccessfully to reorganize the firm, decided that the only recourse was liquidation under Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $500,000, while the current assets were sold for another $350,000. Thus, the total proceeds from the liquidation sale were $850,000. Trustee’s costs amounted to $175,000; no single worker was due more than $2,000 in wages; and there were no unfunded pension plan liabilities. In class, we discussed “Round 1” of bankruptcy distribution. Which claimants listed below are classified as “Round 1” claimants? How much did each receive (in dollars) and as a percentage of the claim filed? In class, we discussed “Round 2” of bankruptcy. Which claimants listed below are classified as Round 2 claimants? How much will they receive from the liquidation (express your answer in dollars and as a percentage of the claim filed)? Who are the remaining general creditors? Are their claims fully satisfied? Explain (you do not need to calculate anything). Balance Sheet Current assets $450.00 Accounts payable $40.00 Net fixed assets $650.00 Accrued taxes $50.00 Accrued wages $30.00 Notes payable $190.00 Total current liabilities $310.00 First-mortgage bonds $400.00 Second-mortgage bonds $400.00 Common stock $140.00 Retained earnings -$150.00 Total assets $1,100.00 Total claims $1,100.00 Balance Sheet Current assets $450.00 Accounts payable $40.00 Net fixed assets $650.00 Accrued taxes $50.00 Accrued wages $30.00 Notes payable $190.00 Total current liabilities $310.00 First-mortgage bonds $400.00 Second-mortgage bonds $400.00 Common stock $140.00 Retained earnings -$150.00 Total assets $1,100.00 Total claims $1,100.00 Solution Round 1 Claimants- Distribution in Bankruptcy under chapter 7 is firstly made to priority claims. These are the list of priority claims. (‘1) Administrative expense of bankruptcy case (‘2) Wages (‘3) Certain Tax Obligation In this category distribution made to following claims as under. Trustee’s Cost 175,000 Accrued Wages 30,000 Accrued taxes 50,000 Total 255,000 Balance Amount (850,000-255,000) 595,000 Round -2 Claimants- In this category payments made to secured creditors. In the given case distribution will be as under First Mortgage Bonds 400,000 Second Mortgage Bond (595-400) 195,000 Total 595,000 Second mortgage holder of $ 205,000 will not get their claim. Accounts payable and Notes payable are general unsecured creditors. Trustee’s Cost 175,000 Accrued Wages 30,000 Accrued taxes 50,000 Total 255,000 Balance Amount (850,000-255,000) 595,000.

1. Problem #5: At the time it defaulted on its interest payments and filed for bankruptcy, the Patton
Pharmaceuticals had the following balance sheet (in thousands of US dollars). The court, after
trying unsuccessfully to reorganize the firm, decided that the only recourse was liquidation under
Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mortgage
bondholders, brought in $500,000, while the current assets were sold for another $350,000. Thus,
the total proceeds from the liquidation sale were $850,000. Trustee’s costs amounted to
$175,000; no single worker was due more than $2,000 in wages; and there were no unfunded
pension plan liabilities.
In class, we discussed “Round 1” of bankruptcy distribution. Which claimants listed below are
classified as “Round 1” claimants? How much did each receive (in dollars) and as a percentage
of the claim filed?
In class, we discussed “Round 2” of bankruptcy. Which claimants listed below are classified as
Round 2 claimants? How much will they receive from the liquidation (express your answer in
dollars and as a percentage of the claim filed)?
Who are the remaining general creditors? Are their claims fully satisfied? Explain (you do not
need to calculate anything).
Balance Sheet
Current assets
$450.00
Accounts payable
$40.00
Net fixed assets
$650.00
Accrued taxes
$50.00
Accrued wages
$30.00
Notes payable
$190.00
Total current liabilities
$310.00
First-mortgage bonds
$400.00
Second-mortgage bonds
$400.00

2. Common stock
$140.00
Retained earnings
-$150.00
Total assets
$1,100.00
Total claims
$1,100.00
Balance Sheet
Current assets
$450.00
Accounts payable
$40.00
Net fixed assets
$650.00
Accrued taxes
$50.00
Accrued wages
$30.00
Notes payable
$190.00
Total current liabilities
$310.00
First-mortgage bonds
$400.00
Second-mortgage bonds
$400.00
Common stock
$140.00
Retained earnings
-$150.00
Total assets
$1,100.00
Total claims
$1,100.00

3. Solution
Round 1 Claimants-
Distribution in Bankruptcy under chapter 7 is firstly made to priority claims.
These are the list of priority claims.
(‘1) Administrative expense of bankruptcy case
(‘2) Wages
(‘3) Certain Tax Obligation
In this category distribution made to following claims as under.
Trustee’s Cost
175,000
Accrued Wages
30,000
Accrued taxes
50,000
Total
255,000
Balance Amount
(850,000-255,000)
595,000
Round -2 Claimants-
In this category payments made to secured creditors. In the given case distribution will be as
under
First Mortgage Bonds
400,000
Second Mortgage Bond
(595-400)
195,000
Total
595,000
Second mortgage holder of $ 205,000 will not get their claim.
Accounts payable and Notes payable are general unsecured creditors.
Trustee’s Cost
175,000
Accrued Wages
30,000

4. Accrued taxes
50,000
Total
255,000
Balance Amount
(850,000-255,000)
595,000