Let’s examine a case using Greg’s Tunes and Sal’s Silly Songs. It is now the end of the first year of operations, and the stockholders want to know how well each business came out at the end of the year. Neither business kept complete accounting records, and no dividends were paid. The businesses throw together the data shown on the next page at year-end: \( 23,000 8,000 35,000 22,000 \) 10,000 6,000 44,000 9,000 Total Assets Common Stock Total Revenues Total Expenses Greg’s Tunes: Sal’s Silly Songs: Total Liabilities Common Stock Total Expenses Net Income To gain information for evaluating the businesses, the stockholders ask you several questions. For each answer, you must show your work to convince the stockholders that you know what you are talking about.

Requirements 2. Which business owes more to creditors?

Step by step solution

01

Calculation of Total Liabilities for Sal’s Silly Songs

Total liabilities is calculated as follows:

$\begin{array}{rcl}\mathrm{Total}\mathrm{liabilities}& =& \mathrm{Total}\mathrm{assets}-\mathrm{Common}\mathrm{stock}-\left(\mathrm{Revenues}-\mathrm{Expenses}\right)\\ & =& \$23,000-\$8,000-\left(\$35,000-\$22,000\right)\\ & =& \$2,000\end{array}$

02

Business with more assets explanation

Creditors are the part of total liabilities. Total liabilities for Sal’s Silly Songs equals $2,000 and Greg’s Tunes equals $10,000. Hence, it can be concluded that Greg’s Tunes has higher creditors.

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