Question

1. Continuing Venture, Inc. has the following balance sheet, with negative owner’s equity.  Are they solvent?  Why or why not? [Hint:  identify elements of the balance sheet that indicate they are solvent, and ones which indicate trouble]

ASSETS
	Cash		$5,000
	Receivables		$60,000
	Inventories		$70,000
	Total Current Assets		$135,000
	Gross Property, Plant & Equipment		$205,000
	Less Accum Deprec		$28,000
	Net Plant & Equip		$177,000
	Total Assets		$312,000
LIABILITIES & EQUITY
	Accts Payable		$47,000
	S/T bank loan		$40,000
	Accrued liabilities		$8,000
	Total Current Liabilities		$95,000
	Long-term  debt		$267,000
	Paid-In Capital		$100,000
	Retained Earnings		$(150,000)
	Total Owners' equity		$(50,000)
	Total Liab & O.E.		$312,000

Answer 1

Are they solvent?

Yes.

why not?

Negative Owner Equity is indicator of Insolvency, but does not mean that the company having Negative Owner's Equity are insolvent.

When companys Loss is more than companys accumulated profit, then there is Negative Owners Equity( Retained Earning).

elements of the balance sheet that indicate they are solvent

Companies Current Assets is more than Current Liabilities, it means Companys *Current ratio is more than 1 which is considered to represent good short-term liquidity.

*Current Ratio = Current Assets/Current Liabilities=$135000/95000=1.42.

elements of the balance sheet that indicate they are in trouble

1. Long term debt is more than the amount of companys Fixed Assets is showing trouble situation for the compancy

2. Negative Retained Earning also indicates contineous series of loss.