The financial condition of GreyCo Inc. is expressed in the following accounting equation:
| Assets |
Liabilities + Common stock + Retained earning |
| $800 Cash + $9,200 Land |
$7,000 + $2,000 + $1,000 |
Required:
a. Are dividends paid to creditors or investors? Explain why.
b. How much cash is in the Retained Earnings account?
c. Determine the maximum dividend GreyCo can pay.
d. If the obligation to creditors is due, can GreyCo repay the loan? Why or why not?
e. Suppose the land sinks into the sea as a result of an earthquake and a resulting tsunami. The business is then liquidated. How much cash will creditors receive? How much cash will investors receive? (Assume there are no legal fees or other costs of liquidation.)