Question

Montavon Winery had $3,000,000 of short-term debt. Following (subsequent to) the balance sheet date, but before issuing the balance sheet, the company issued 100,000 shares of common stock, intending to use the proceeds to liquidate the short-term debt at its maturity. If Montavon's net proceeds from the sale of the 100,000 shares total $2,000,000, what would Montavon's current and long-term liabilities be?

Answer 1

After Montavon Winery's stock issuance, their current liabilities reduce to $1,000,000 with long-term liabilities unaffected. Acme Bank's balance sheet reflects increased reserves and loans with decreased bonds after the Fed's open market purchase. A hypothetical bank's net worth is calculated as $220 from the provided asset and liability figures.

Step-by-step explanation:

Montavon Winery's Current and Long-term Liabilities

After the issuance of 100,000 shares of common stock and the net proceeds of $2,000,000, Montavon Winery intended to use the funds to pay off its $3,000,000 of short-term debt. Assuming all proceeds are used for this purpose, Montavon's current liabilities would decrease by $2,000,000, leaving $1,000,000 of short-term debt remaining. If the company has no other long-term liabilities, then none would be reported in this scenario.

Acme Bank Balance Sheet Changes

When Acme Bank sells $10 million in Treasury bonds to the Fed, its reserves increase by $10 million, while the bonds asset decreases by $10 million. If Acme then uses these proceeds to make new loans, its loans would increase by $10 million. However, several conflicting versions of the Acme bank's initial balance sheet were presented. For consistency, let's proceed with the first option. Before the transaction, Acme Bank would have:

• Assets: Reserves $30 million, Bonds $50 million, Loans $50 million
• Liabilities: Deposits $300 million, Equity $30 million

After the open market purchase and issuing new loans:

• Assets: Reserves $40 million, Bonds $40 million, Loans $60 million
• Liabilities: Deposits $300 million, Equity $30 million

Note that deposits and equity remain unchanged while reserves and loans increase and bonds decrease.

\Bank's T-account Balance Sheet and Net Worth

Setting up a T-account for the bank with deposits of $400, reserves of $50, government bonds worth $70, and loans of $500:

• Assets: Reserves $50 + Bonds $70 + Loans $500 = $620
• Liabilities: Deposits $400

Net Worth (Equity) = Assets - Liabilities = $620 - $400 = $220

The bank's net worth is $220.