Please use the following Balance Sheet to answer the questions below Assets Cash
ID: 415231 • Letter: P
Question
Please use the following Balance Sheet to answer the questions below Assets Cash Marketable Securities Accounts Receivable Inventories Prepaid Taxes and Insurance Manufacturing Plant at cost Less Accumulated Depreciation Net fixed Assets Goodwil $150,000 $200,000 $150,000 $50,000 $30,000 $600,000 $100,000 $500,000 $20,000 Liabilities and Shareholders Equity Notes Payable Accounts Payable Income Taxes Payable Long Term Mortgage Bond:s Preferred Stock, 6%, $100 par value (1,000 shares) Common Stock, $15 par value (10,000 shares) Capital Surplus Retained Earnings $50,000 $100,000 $80,000 $400,000 $100,000 $150,000 $150,000 $70,000Explanation / Answer
In case of bankruptcy, the entities which get paid in sequential order are as follows:
Secured creditors (Example loan for machinery against secured property of company)
Unsecured creditors (Example: Payment to bondholders who are supposed to get paid a t certain interest rate)
Shareholders (the last to get paid)
If a company liquidates, a line of outstretched hands forms to collect the proceeds. At the head of the line is the Internal Revenue Service to collect any back taxes and the trustees charged with carrying out the liquidation. Next come the creditors and employees, followed by the preferred shareholders and finally the holders of common stock.
Thus, with reference to this problem, both preferred and common stock owners should be treated under the same pedestal and must come as last priority for payment in case of liquidation
Therefore , correct answer should be “ Both preferred and common stock owners are treated equal because they both own shares of the company”
ANSWER : BOTH PREFERRED AND COMMON STOCK OWNERS ARE TREATED EQUAL BECAUSE THEY BOTH OWN SHARES OF THE COMPANY
Manufacturing plant involves a significant investment which runs for years to produce designated goods/products. Any asset which lasts more than 1 year, normally is considered to be long term asset. In case of manufacturing plant , it definitely lasts for more than 1 year and therefore should be considered as long term asset.
The correct answer therefore will be “ Long term because value is realized and depreciated over several years”
ANSWER : LONG TERM BECAUSE VALUE IS REALIZED AND DEPRECIATED OVER SEVERAL YEARS
ANSWER : BOTH PREFERRED AND COMMON STOCK OWNERS ARE TREATED EQUAL BECAUSE THEY BOTH OWN SHARES OF THE COMPANY