Question

	Assets	=	Liabilities	+	Common Stock	+	Retained Earnings
Allen	$11,000	=	$7,700	+	$2,640	+	$ 660
White	$16,000	=	$3,840	+	$8,960	+	$3,200

Required
a. Based on this information alone, can White pay a $3,800 dividend?

• Yes

• No

b-1. Reconstruct the accounting equation for each company using percentages on the right side of the equation instead of dollar values.

b-2. Which company is more financially stable?

• Allen

• White

c. Assume Allen incurs a $5,300 operating loss. The remaining assets are sold for the value shown on the books, and the cash proceeds are distributed to the creditors and investors. How much money will be paid to creditors and how much will be paid to investors?

d. Assume White incurs a $5,300 operating loss. The remaining assets are sold for the value shown on the books, and the cash proceeds are distributed to the creditors and investors. How much money will be paid to creditors and how much will be paid to investors?

Answer 1

Requirement a

White is not able to pay $3,000 cash dividends since the retained earnings is barely $3,200 which is less than the $3,800 cash dividends to be paid. In addition, we do not know what portion of assets is cash.

Requirement b1

For Allen

Assets = Liabilities + Common Stock + Retained Earnings

$11,000 = 70%+ 24%+ 6%

Requirement b2

For White

Assets = Liabilities + Common Stock + Retained Earnings

$16,000 = 24%+ 56%+ 20%

White Inc. is more finally stable since the percentage of liabilities in regard to that of assets is only 24% while for Allen Inc. the percentage is 70%. It therefore means that White Inc. will be able to meet its obligation without the need for borrowing unlike Allen Inc.

Requirement c

Loss incurred by Allen = $5,300

Remaining Assets = $11,000- $5,300 = $5,700

Since the amount is not able to cover the company’s total obligation to creditors of $7,700, Creditors will be paid the $5,7500 realized from the sale, while investors will go home empty handed since Creditors are considered first in the event that a company liquidates or becomes bankrupt.

Requirement d

Loss incurred by White = $5,300

Remaining Assets = $16,000-$5,300

                             = $10,700

Creditors will be paid first an amount of $3,840 then investors will be paid the remaining $6,860.