Question

A company purchases $200 worth of equipment using a business line of

credit. Since this is a liability, which of the following should be included in this
transaction?

Answer 1

The firm's accounting profit is $50,000, calculated by subtracting total expenses of $950,000 from sales revenue of $1,000,000. A bank's balance sheet shows assets of $620 and liabilities of $400, resulting in a net worth of $220.

Step-by-step explanation:

To determine a firm's accounting profit, we must subtract the total expenses from the sales revenue. In the given scenario, a company had sales revenue of $1 million last year. The expenses were as follows: $600,000 on labor, $150,000 on capital, and $200,000 on materials. The main answer is calculated as follows:

• Total Revenue: $1,000,000
• Total Expenses: $600,000 (labor) + $150,000 (capital) + $200,000 (materials) = $950,000
• Accounting Profit: Total Revenue - Total Expenses = $1,000,000 - $950,000 = $50,000

The accounting profit for the firm is therefore $50,000.

For the T-account and bank's net worth part of the question, we set up a balance sheet showing assets and liabilities:

• Assets:
  • Reserves: $50
  • Government Bonds: $70
  • Loans: $500
• Liabilities:
  • Deposits: $400
• Net Worth: Assets - Liabilities = ($50 + $70 + $500) - $400 = $220

The bank's net worth is calculated to be $220.