Your friend says that their new companys assets do not equal

Your friend says that their new company’s assets do not equal liabilities plus shareholder’s equity. Does your friend describe a legal or economic bankruptcy? Explain your answer.

Solution

Bankruptcy described here is an Ecomomic Bankruptcy .

Bankruptcy is a legal status of a person or other entity that cannot repay debts to creditors. In most jurisdictions, bankruptcy is imposed by a court order.

A bankruptcy that has resulted in legal proceedings is treated as Legal Bankruptcy. On the other hand, when company\'s assets do not equal liabilities plus shareholder’s equity but not yet resulted in legal proceedings is treated as Economic Bankruptcy.