Question

Alexis Company was started in Year 1. At the end of Year 1 the Company had the following accounting equation.Assets = Liabilities + Stockholders' EquityCash + Land = Notes Payable + Common Stock + Retained Earnings600 + 2,200 = 1,000 + 1,400 + 400During Year 2, the company experienced the following accounting events.Paid off $500 of its note payableEarned $700 of cash revenue.Paid $400 of cash expenses.Paid a $100 cash dividend.Based on this information alone, what percent of the company's assets at the end of Year 2 were provided by earnings?

Answer 1

Answer:

Company's assets at the end of Year 2 were provided by creditors = 20%

Explanation:

Calculation of Cash at the end of Year 2

Cash balance at the end of Year 1     $600

Less: Paid off to notes payable          ($500)

Add: Earned cash revenue                 $700

Less: Paid cash expenses                   ($400)

Less: Paid cash dividend                     ($100)

Cash balance at the end of Year 2    $300

Notes payable at the end of Year 2 = Beginning balance - Paid off

= $1,000 - $500

= $500

Calculation of Notes Payable at the end of Year 2

Notes Payable at the end of Year 1     $1000

Less: Paid off to notes payable            ($500)

Notes Payable at the end of Year 2 $500

Total assets at the end of Year 2 = Cash + Land

= $300+2200

= $2500

Creditors at the end of the Year 2 (Notes payable) = $500

Company's assets at the end of Year 2 were provided by creditors = Creditors * 100 / Total assets

= $500 * 100 / $2500

= 20%