Accounting Module 1 exercises

Paid operating expenses with cash

Assets decrease, retained earnings decrease

Paid cash dividends to stockholders

Assets decrease, retained earnings decrease.

Purchased land with cash

Assets increase and decrease. They decrease first because the buyer spent money to purchase land. However, land itself is an asset so it then increases, causing no negative affect.

Accquired cash from common stock

Assets increase, common stock increases

Borrowed cash

Assets increase, liabilities increase

Are dividends paid to creditors or investors? Explain.

Dividends are paid to investors. The investor has an ownership interest in the business that allows the investor (owner) to share in the profits of the business. This pay out of a share of profits of a business to the owners is called a dividend.

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 conditions of liquidation)

If the land becomes worthless, the only asset remaining is the cash of $800. Since creditors have first claim on the assets, all of the $800 will be paid to the creditors. The investors will not be paid anything.

If the obligation to creditors is due, can White repay the loan? Why or why not?

If the total amount of the liability of $7,000 is due, White will not be able to satisfy the obligation. White has only $800 of cash; the balance of the assets are contained in the Land account. If payment must be made to creditors, White will have to liquidate the company in order to pay the debt.

Determine the maximum dividend White can pay $800 Cash+$9200 Land= $7000 Liab+ $2000 Common Stock + $1000 Retained Earnings

The amount of dividends that can be paid are limited to retained earnings. In addition, a company must have enough cash to pay the dividend. White has $1,000 of retained earnings but only $800 of cash. The maximum amount of dividend that could be paid at this time would be $800.

How much cash is in the retained earnings account?

There is no cash in the Retained Earnings account. Retained Earnings represents the business's commitments to its stockholders. It is the amount of past earnings that have not been paid out to owners.

True or False? closing balances of assets, liabilities, and stockholders equity are the same as opening balances the next year

True