Question

Emerald Company was established in January, Year 1. During Year 1 the company experienced the following events

• Collected $50,000 cash from the issue of common stock.
• Borrowed $45,000 cash from the state bank.
• Earned $120,000 of cash revenue.
• Paid $180,000 cash expenses.

The company was liquidated at the end of Year 1. Based on this information
A. the stockholders would receive $50,000.

B. the stockholders would receive $110,000.

C. the creditor (the bank) would receive $35,000.

D. the creditor (the bank) would receive $45,000.

Answer 1

The creditor (the bank) would receive $45,000 when Emerald Company is liquidated, as liabilities are settled before any distributions to shareholders. Stockholders would not receive anything because the company's debts exceed its assets.

Step-by-step explanation:

The correct direct answer to Emerald Company's scenario is: D. the creditor (the bank) would receive $45,000. The stockholders would not receive any amount because the liabilities exceed assets after liquidation.

Here's an explanation of the scenario: Initially, the company collects $50,000 from issuing common stock and borrows $45,000 from the state bank. It then earns $120,000 in cash revenue but pays $180,000 in cash expenses. This results in a net cash outflow of $60,000 ($120,000 - $180,000). By the end of the year, when the company is liquidated, it has $110,000 ($50,000 + $45,000 + $120,000 - $180,000) in cash. However, this amount must first be used to repay the bank's loan fully before any remaining cash can be distributed to stockholders. Therefore, the bank receives the full $45,000, and there are no remaining assets to distribute to the stockholders.

This scenario underlines the principle that creditors are paid before equity holders in the event of liquidation. It's related to financial business concepts, focusing on common stock, liquidation, and creditor's rights.