Question

Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation.

Cash: 600
land 2200
notes payable 1000
common stock 1400
retained earnings 400

During Year 2, the company experienced the following accounting events.

• Paid of $500 of its note payable.
• Earned $700 of cash revenue.
• Paid $400 of cash expenses.
• Paid a $100 cash dividend.

Based on this information alone, what percent of the company's assets at the end of Year 2 were provided by creditors?
Mutiple Choice

A. 20%
B. 24%
C. 56%
D. Some other percentage

Answer 1

After adjusting the accounting equation based on Year 2's transactions, Alexis Company's assets total $2500, and liabilities are $500. The percentage of assets provided by creditors is 20%.

Step-by-step explanation:

To calculate the percentage of the company's assets provided by creditors at the end of Year 2, we first need to update the accounting equation with the transactions provided for Year 2. Initially, the company's assets were Cash: $600 and Land: $2200, totaling $2800. We will adjust the assets and liabilities as follows:

1. Paid off $500 of its note payable, decreasing liabilities and cash (asset).
2. Earned $700 of cash revenue, increasing cash (asset).
3. Paid $400 of cash expenses, decreasing cash (asset).
4. Paid a $100 cash dividend, which impacts retained earnings and decreases cash (asset).

After these adjustments, the assets and liabilities at the end of Year 2 are:

• Assets = Original Cash ($600) - Note Payable Payment ($500) + Cash Revenue ($700) - Cash Expenses ($400) - Cash Dividend ($100) + Land ($2200) = $2500.
• Liabilities = Original Notes Payable ($1000) - Note Payable Payment ($500) = $500.

The percentage of assets provided by creditors is the total liabilities divided by the total assets. Thus, the calculation is $500 (Liabilities) / $2500 (Assets) = 20%. Therefore, the correct choice is A. 20%.