Question

Which of the following situations describes a person who could be insolvent?a.Assets $56,000; annual expenses $60,000b.Assets $78,000; net worth $22,000c.Liabilities $45,000; net worth $6,000d.Assets $40,000; liabilities $55,000e.Annual cash inflows $45,000; liabilities $50,000

Answer 1

Answer:

Assets $40,000 , Liabilities $55,000

Explanation:

Insolvency occurs when a company is not able to continue operation into a foreseeable future as a result of not being able to meet up with its financial obligation.

At this point . assets are sold to pay the creditor and the company is de- registered .

One useful tool of evaluating this is gearing ratio. Gearing ratio compares the company's asset to its liabilities to reveal its degree of reliance on borrowed fund.Ratio less than 25% seems good while ratio higher than 50% is bad.

The only information that compares the assets to liabilities in the question gives the assets as $40,000 and liabilities as $55,000.Gearing ratio = 40,000/55000= 0.72 = 72%.

Any ratio higher than 50% is a bad signal

Answer 2

Answer:

d.Assets $40,000; liabilities $55,000

Explanation:

Insolvent: When the person is not able to pay its debts. The maximum money will be recovered from his estates as the person is not in the position to pay its dues.  

From the above options, option d is the most appropriate option as the liabilities consisted of a large amount whereas the asset values are of less amount.