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o The land and building are in an excellent location and can be sold for a figure 10 percent above book value. However, the equipment was specially...

  1. Illustrate hypothetical calculations that would be done to help creditors understand how much money they might receive if the company
  2. were to liquidate. Ensure all information is entered accurately. Please refer to the illustration (Exhibit 13.2) on page 592 from your textbook to view potential calculations. 

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o The land and building are in an excellent location and can be sold for a
figure 10 percent above book value. However, the equipment was specially
designed for Chaplin. Company officials anticipate having trouble finding a
buyer for this equipment unless the price is reduced considerably. Unless
they have exceptionally good luck, they expect to receive only 40 percent
of current book value for these assets. 0 Administrative costs of $21,500 are projected if the company does
liquidate. o Accrued expenses are listed on the balance sheet as $18,000. That
amount includes salaries of $14,000. This figure includes one person who
is owed $13,475 but is the only employee due an amount above $12,475.
Other accrued expenses total $4,000. In addition, payroll taxes of $2,000
have been withheld from employee wages but not yet paid to the
government or recorded as a liability. 0 Interest of $5,000 on the company's long-term liabilities has not yet been
accrued for the first six months of 2014. From this information, the statement of financial affairs presented in Exhibit 13.2 for the Chaplin Company was prepared. Several aspects of this
statement should be specifically noted:

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Available tor Boot: Unsecured
Values Creditors
Assets
Pledged with fully secured creditors:
$210,000 Land and bulking .................. 5231.000
Less: Notes payable (long term) ........ (200.000)
hterest parable .................... M $26,000
Pledged with partially secured creeltors:
41.000 Inventory ......................... 5 45.000
Less: Notes payable (current) .......... (75.000) -0-
Free assets
2.000 Cash ............................ 2.000
15.000 Investment In marketable securities ..... 20.000
-0- Dividends receivable ................. 500
23.000 Accounts receivable ................. 12.000
3.000 Prepaid expenses ................... 1.000
30,000 Equipment ........................ 32.000
1 5.000 htanglble assets ................... -0-
Total avaiabie to pay liabilities with
priority and unsecured creditors ....... 93,500
Less: Liablitles with priority
(see ® below It Liabilities) .......... (36500)
Available for unsecured creditors ....... 57,000 ®
Estimated deficiency ................ 38'000 (D
$389,000 595:000
Unsecured—-
Book Nonprlotlty
Values Liabilities
liabilities and Stockholders Equity
Liabilities with priority:
5 -0- Amllnistlatlve expenses (esthlated) ..... 5 21,500
14,000 Salaries payable (accrued expenses) ..... 13,000 5 1.000 ©
-0- Payroiltabespayaaie(accruedexperses).... 2.000
Total ............................ 5 36.500 ®
Fully secured creditor:
200.000 Notes payable ..................... S 200,000
-0- Interest payable .................... 5.000
Less: Land and building ............... (231,000) -0-
Partlaly secured creators:
75.000 Notes payable ..................... 5 75,000
Less: Inventory ..................... (45.000) 30.000
Unsecured creditors:
60,000 Accounts payable ................... 60.000
4,000 Accrued expenses (other than salaries
and payroll taxes) .................. 4.000
36.000 Stoddlolders' equity ................. -0-
53394 $95,000

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EXHIBIT 13.2 1. The current and noncurrent distinctions usually applied to assets and
liabilities are omitted from this financial statement. Because the company
is on the verge of going out of business, such classifications are
meaningless. Instead, the statement is designed to separate secured
from unsecured balances. 2. Book values are included on the left side of the schedule but only for
informational purposes. These figures are not relevant in a bankruptcy.
All assets are reported at estimated net realizable value, whereas
liabilities are shown at the amount required for settlement. 3. Both the dividend receivable and the interest payable are included in
Exhibit 13.2, although neither has been recorded to date by the
company on its balance sheet. The payroll tax liability also is reported at
the amount the company presently owes. The statement of financial
affairs is designed to disclose currently updated figures. 4. Liabilities having priority are individually identified within the liability
section (Point A). Because these claims will be paid before other
unsecured creditors, the $36,500 total is subtracted directly from the free
assets (Point B). Although not yet incurred, estimated administrative
costs are included in this category because such expenses will be
necessary for a liquidation. Salaries are also considered priority
liabilities. However, the $1,000 owed to one employee in excess of the
individual $12,475 limit is separated and shown as an unsecured claim
(Point O). 5. According to this statement, if liquidation occurs, Chaplin expects to
have $57,000 in free assets remaining after settling all liabilities with
priority (Point D). Unfortunately, the liability section shows unsecured
claims of $95,000. These creditors, therefore, face a $38,000 loss
($95,000 — $57,000) if the company is liquidated (Point E). This final
distribution is often stated as a percentage: Free assets _ $57,000 _ 60%.
Unsecured claims $95,000 Unsecured creditors can anticipate receiving 60 percent of their claims.
An individual, for example, to whom this company owes an unsecured
balance of $400 should anticipate collecting only $240 ($400 x 60%)
following liquidation. However, this is merely an estimation. 6. If the statement of financial affairs had shown the company with more
free assets (after subtracting liabilities with priority) than the total amount
of unsecured claims, all of the creditors could expect to be paid in full
with any excess money going to Chaplin's stockholders.

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