Question

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:
Multiple Choice
a. the stockholders would receive $50,000.
b. the stockholders would receive $110,000.
c. the creditor (the bank) would receive $35,000.(correct)
How did we get 35000 ?

Answer 1

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

Step-by-step explanation:

In this scenario, the company collected $50,000 cash from the issue of common stock and borrowed $45,000 cash from the state bank. The total cash inflow is $50,000 + $45,000 = $95,000. However, the company also had $180,000 cash expenses. Since the cash inflow is less than the cash outflow, the company would not have enough cash to pay its creditors, including the bank. Therefore, the creditor (the bank) would receive $35,000, which is the remaining cash after paying off the expenses. Hence, option c. the creditor (the bank) would receive $35,000 is correct.