Question

+ + Assets $15,000 $13,000 Liabilities $9,300 $3,250 Allen White + Common Stock $2,400 $7,150 + Retained Earnings $ 3,300 $2,600 + +

a. Based on this information alone, can White pay a $5,400 dividend?

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 or White

c. Assume Allen incurs a $6,900 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 $6,900 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

Solution:

a. White cannot pay cash dividends $5,400

b.

Company	Assets	=	Liabilities	+	Common stock	+	Retained earnings
Allen	100%	=	62%	+	16%	+	22%
White	100%	=	25%	+	55%	+	20%

b2.  

White is more financially stable

C.

Amount to paid creditors	$8,100
Amount to paid investors	0

d.

Amount to paid creditors	$3,250
Amount to paid investors	$2,850

Explanation:

a.

White cannot pay a $5,400 cash dividend because, they only show a retianed earnings balance of $2600 . There is not enough information is given to determine what exact amount of dividend that could be paid.

b.

Company	Assets	=	Liabilities	+	Common stock	+	Retained earnings
Allen	15,000 100%	=	62% (9300/15000)x100	+	16% (2400/15000)x100	+	22% (3300/15000)x100
White	100% 13,000	=	25% (3250/13000)x100	+	55% (7150/13000)x100	+	20% (2600/13000)x100

b2.

Based on the equation calculations above, White is more financially stable. White's debt is only 25% of its assets, as opposed to allen, whose debt is 62%of its assets.

C.

If allen were to incur a $6,900 and the remaining assets are sold. Its assets would be reduced to $8,100 (15000 - 6900)). Because allen's creditors are owed $9,300 , all remaining assets would be paid to them and the investors would not receive anything.

d.

If White were to incur a $6,900 loss and the remaining assets are sold, its assets would be reduced to $6,100 (13000 - 6900). White's creditors would receive the full $3,250 owed and the remaining assets of $2,850(6100-3250) would be paid to the investors.