Homework Soursequestion 1 Laredo Company reported total assets of 7 millio
question 1.
Laredo Company reported total assets of $ 7 million and totalliabilities of $4 million at the end of 2010.
I. Construct the balance sheet equation for Laredo Company at the end of 2010 adn include the correct amount for owners\' equity.
II. Suppose that during January 2011 Laredo borrowed $2 million from Wells Fargo Bank. How would this affect Laredo\'s assets, Liabilities, and owners\' equity?
Solution
We know Assets - Liabilities = Capital (Owner\'s equity)
in a business.
Using the above, we know Balance sheet will have one side as assets and one side as liabilities and balancing figure as capital normally in Liabilities side.
Hence
| Balance Sheet at the end of Accounting year 2010 | ||||||
| Liabilities | Assets | |||||
| Owners equity | 3,000,000 | Assets | 7,000,000 | |||
| Other liabilities | 4,000,000 | |||||
| Total | 7,000,000 | 7,000,000 | ||||
| In Jan 2011 | ||||||
| Cash | Dr. | 2,000,000 | ||||
| Wells Forgo Bank | 2,000,000 | |||||
| (Being amount borrowed from Wells Cargo Bank) | ||||||
| Now cash (Assets) will increase by 2,000,000 and Liabilities also 2,000,000 | ||||||
| Balance Sheet at the end of Accounting year January 2011 | ||||||
| Liabilities | Assets | |||||
| Owners equity | 3,000,000 | Assets | 7,000,000 | |||
| Wells Forgo Bank | 2,000,000 | Cash | 2,000,000 | |||
| Other liabilities | 4,000,000 | |||||
| Total | 9,000,000 | 9,000,000 |
