Residual Claims [LO1] Bishop, Inc., is obligated to pay its creditors

Residual Claims [LO1] Bishop, Inc., is obligated to pay its creditors

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July 12, 2022
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Residual Claims [LO1] Bishop, Inc., is obligated to pay its creditors $7,800 during the year. a. What is the market value of the shareholders’ equity if assets have a market value of $9,400? b. What if assets equal $6,700?

Answer and ExplanationSolution by a verified expert

A.
Step 1 of 2
Identify the information needed to calculate the equity. This includes the market value of assets (A) and the amount due to creditors (C).

\begin{aligned}A&=\$9,400\\C&=\$7,800\end{aligned}
AC​=$9,400=$7,800​
Step 2 of 2
Compute the market value of shareholders' equity (E) by subtracting the amount due to creditors (C) from the market value of assets (A).

\begin{aligned}E&=A-C\\&=\$9,400-\$7,800\\&=\$1,600\end{aligned}%
E​=A−C=$9,400−$7,800=$1,600​
Final answer
$1600

B.
Here is a tip:
Shareholders' equity is computed by subtracting the total liabilities from the total assets.

Explanation
The value of shareholders' equity is either the amount by which the total assets exceed the total liabilities or zero.

It cannot be negative. If the value of the assets is $6,700 and the total liabilities are $7,800, then the shareholders' equity will be equal to zero. A negative value of shareholder equity means that the company is paying money to own stock.

Verified Answer
The value of the equity will be zero.

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