Assume that Harris Company acquires $2,500 cash from creditors and $3,500 cash from investors.

Assume that Harris Company acquires $2,500 cash from creditors and $3,500 cash from investors.

Required

b.

If Harris has net income of $2,500 and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive?   c. If Harris has a net loss of $2,500 cash and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive?   d. If Harris has a net loss of $3,600 cash and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive?   Explanation: b. HARRIS COMPANY Accounting Equation Event Assets = Liabilities + Stockholders’ Equity   Acquired assets $ 6,000     $ 2,500     $ 3,500     Earned income   2,500               2,500            Balance $ 8,500     $ 2,500     $ 6,000         Since creditors are owed $2,500 and there are sufficient funds to pay them; the creditors will receive the $2,500 that they are owed. Since the investors own the business, they are entitled to the profits earned by the business. The investors will receive $6,000 (their original $3,500 investment plus the $2,500 of profit). c. HARRIS COMPANY Accounting Equation Event Assets = Liabilities + Stockholders’ Equity   Acquired assets $ 6,000     $ 2,500     $ 3,500     Incurred loss   (2,500 )             (2,500 )          Balance $ 3,500     $ 2,500     $ 1,000         Since creditors are owed $2,500 and there are sufficient funds to pay them; the creditors will receive the $2,500 that they are owed. Since the investors own the business, they suffer the losses earned by the business. The investors will receive $1,000 (their original $3,500 investment minus the $2,500 loss). d. HARRIS COMPANY Accounting Equation Event Assets = Liabilities + Stockholders’ Equity   Acquired assets $ 6,000     $ 2,500     $ 3,500     Incurred loss   (3,600 )     (100 )     (3,500 )          Balance $ 2,400     $ 2,400     $ 0         While creditors get first priority to receive assets in a business liquidation, this does not mean they cannot lose all or a portion of the assets they loan a business. In this case creditors are owed $2,500 but the business has only $2,400 of assets. Since the creditors have first priority, the entire $2,400 would be distributed to them. In this case the creditors lose $100 ($2,500 original loan – $2,400 returned). Since the investors own the business, they suffer the losses earned by the business. The investors will lose the entire $3,500 they contributed to the business.