Exercise $1-10$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 $1-10$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 $$7,000$ is due, GreyCo. $($will$/$ will not$)$ Explain:

e$.$ If the land becomes worthless, the creditors will be paid The investors will receive $