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Exercise 1 - 1 0 B Interpreting the accounting equation The financial condition of GreyCo Inc. is expressed in the following accounting equation: Required a
Exercise B Interpreting the accounting equation The financial condition of GreyCo Inc. is expressed in the following accounting equation: Required a Are dividends paid to creditors or investors? Explain why. b How much cash is in the Retained Earnings account? c Determine the maximum dividend GreyCo can pay. d If the obligation to creditors is due, can GreyCo repay the loan? Why or why not? e Suppose the land sinks into the sea as a result of an earthquake and a resulting tsunami. The business is then liquidated. How much cash will creditors receive? How much cash will investors receive? Assume there are no legal fees or other costs of liquidation. EXERCISE B SOLUTION a Dividends are paid to Explain why: b There is cash in the Retained Earnings account. Retained Earnings represents: c The amount of dividends that can be paid are limited to In addition, a company must have enough to pay the dividend. Grey Co can pay a maximum amount of dividend of d If the total amount of the liability of $ is due, GreyCo. will will not Explain: e If the land becomes worthless, the creditors will be paid The investors will receive $
Exercise B Interpreting the accounting equation
The financial condition of GreyCo Inc. is expressed in the following accounting equation:
Required
a Are dividends paid to creditors or investors? Explain why.
b How much cash is in the Retained Earnings account?
c Determine the maximum dividend GreyCo can pay.
d If the obligation to creditors is due, can GreyCo repay the loan? Why or why not?
e Suppose the land sinks into the sea as a result of an earthquake and a resulting tsunami. The business is then liquidated. How much cash will creditors receive? How much cash will investors receive? Assume there are no legal fees or other costs of liquidation.
EXERCISE B SOLUTION
a Dividends are paid to Explain why:
b There is cash in the Retained Earnings account. Retained Earnings represents:
c The amount of dividends that can be paid are limited to In addition, a company must have enough to pay the dividend. Grey Co can pay a maximum amount of dividend of
d If the total amount of the liability of $ is due, GreyCo. will will not Explain:
e If the land becomes worthless, the creditors will be paid The investors will receive $
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