Answered: How much Excess Reserves does Second…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Second National Bank has Reserves (Cash) of $25,000 and Demand Deposits of $100,000. The Required Reserve Ratio is 25%. Households deposit $4,000 in currency into their Checkable Deposit accounts at Second National Bank (remember that the bank's balance sheet must remain in balance). How much Excess Reserves does Second National Bank now have?

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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Wasn't the $25,000 on the initial Reserve considered Required Reserve? If so, the Excess Reseve would originally be $75,000 (100,000*0.75). When the household deposited $4,000 into the bank, the Deposits increased from $100,000 to $104,000. Since the Required Reserve Ratio was 25%, that means, Required Reserve increases $1,000 (4,000*25%), and has $26,000 ($104,000*25%) or ($25,000 + 1,000). As a result, the Excess Reserve now increased 3,000 (4,000 -1,000), and becomes $78,000 ($75,000 + 3000).

Wasn't the answer supposed to be $78,000?

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