P11 Liability comparisons John Bailey invested $50,000 in The Entertainment Company seven years ago. He is concerned about the future of the firm as the profits have plummeted over the last four years. The firm has $120,000 in outstanding debt and is considering declaring bankruptcy.

a. If John is the sole proprietor, describe the financial implication of the firm going bankrupt.

b. If John and his brother, Peter, are partners with an equal partnership distribu- tion, describe the financial implication of the firm going bankrupt.

c. If the firm is a corporation, describe the financial implication of the firm going bankrupt.

LG 4

P12 Accrual income versus cash flow for a period The Motor Corporation sold vehicles for $500,000 to one specific dealer during the year. At the financial year end, the dealer still owed The Motor Corporation $350,000. The cost of the vehicles sold was $400,000, and this cost was incurred and paid by The Motor Corporation.

a. Determine the net profit using the accrual basis of accounting.

b. Determine the net cash flow using the cash basis of accounting.

c. The accountant and financial manager need to present the results to the CEO of

The Motor Corporation. What will be their message regarding the performance of the corporation?