Chapter 1, Problem 6SDC

1.

To determine

Prepare the financial report of Person A and Person J, and compare what it owns and owes on September 30, along with a list of any decisions made while preparing the report.

Explanation of Solution

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

The financial report that compares what A and J own and owe, could be the balance sheet as it summarizes the assets and the liabilities on a given date.

The comparisons were made on the basis of:

• To estimate the net worth of both the individuals;
• Use both the Historical Cost and Fair Value to make an acceptable comparison;
• The potential assets have not been included in the report.

The Net worth of Person A as on September 30 is shown below:

Person A
Particulars	Amount ($)	Amount ($)
Assets
Current Assets
Cash	$1,000
Art work	$800
Total assets (A)		$1,800
Liabilities
Liabilities
Loan payable	$250
Total liabilities (B)		$250
Net Worth $\left(A-B\right)$		$1,550

Table (1)

The Net worth of Person J as on September 30 is shown below:

Person J
Particulars	Amount ($)	Amount ($)
Assets
Current Assets
Cash	$6,000
Play Station Console	$250
Total assets (A)		$6,250
Liabilities
Liabilities
Tuition payable	$800
Loan payable	$4,800
Total liabilities (B)		$5,600
Net Worth $\left(A-B\right)$		$650

Table (2)

The Net worth of Person A as on September 30, based on fair value is shown below:

Person A
Particulars	Amount ($)	Amount ($)
Assets
Current Assets
Cash	$1,000
Art work	$1,400
Total assets (A)		$2,400
Liabilities
Liabilities
Loan payable	$250
Total liabilities (B)		$250
Net Worth $\left(A-B\right)$		$2,150

Table (3)

The Net worth of Person J as on September 30, is shown below:

Person J
Particulars	Amount ($)	Amount ($)
Assets
Current Assets
Cash	$6,000
Play Station Console	$180
Total assets (A)		$6,180
Liabilities
Liabilities
Tuition payable	$800
Loan payable	$4,800
Total liabilities (B)		$5,600
Net Worth $\left(A-B\right)$		$580

Table (2)

2.

To determine

Identify the character that is better amongst Person A and Person J, and justify as a creditor to whom one would rather lend money.

Explanation of Solution

Identify the character that is better amongst A and J and justify as a creditor to whom one would rather lend money as follows:

The financial position of person A is better off than person J as has a greater net worth. Also being a creditor lending money to person A would be far more advisable as person A has greater ability to repay the loan and also has less amount of loan when compared to person J.

3.

To determine

Prepare the financial report that compares what person A and person J earned in October along with a list of any decisions made while preparing the report.

Explanation of Solution

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

The above report was made on the following basis:

• Income tax for both the individuals is not calculated;
• Winning of lottery may not recur.

The Net income of person A in October, is shown below:

Person A
Particulars	Amount ($)	Amount ($)
Revenues
Part Time Job  (for October)		$1,500
Expenses
Rent expense (for October)	$470
Living expenses (for October)	$950
Total expenses		$1,420
Net income		$80

Table (5)

The Net income of person J in October is shown below:

J
Particulars	Amount ($)	Amount ($)
Revenues
Part Time Job  (for October)		$1,950
Expenses
Rent expense (for October)	$800
Living expenses (for October)	$950
Total expenses		$1,750
Net income		$200

Table (6)

4.

To determine

Identify the successful character amongst person A and person J and justify as a creditor to whom one would rather lend money as a three year loan.

Explanation of Solution

Identify the successful character amongst person A and person J and justify as a creditor to whom one would rather lend money as a three year loan as follows:

Person J is more successful than person A in the month of October. However, being a creditor lending money to A would be far more advisable as person A has a stable income which ensures a greater ability to repay the loan and also has less amount of loan when compared to person J.