A general contractor's balance sheet shows total assets of $850,000, current liabilities of $320,000, and long-term debt of $180,000. What is the company's equity?
Correct Answer
A) $350,000
Equity = Total Assets - Total Liabilities. Total Liabilities = Current Liabilities + Long-term Debt = $320,000 + $180,000 = $500,000. Equity = $850,000 - $500,000 = $350,000.
Why This Is the Correct Answer
Option A is correct because equity represents the owner's residual interest in the company after all liabilities are paid. Using the fundamental accounting equation: Assets = Liabilities + Equity, we can rearrange to find Equity = Assets - Liabilities. Total liabilities equal current liabilities ($320,000) plus long-term debt ($180,000) = $500,000. Therefore, equity = $850,000 - $500,000 = $350,000.
Why the Other Options Are Wrong
Option B: $500,000
This amount ($670,000) results from subtracting only the long-term debt ($180,000) from total assets ($850,000), while ignoring current liabilities. Both current and long-term liabilities must be included in the total liabilities calculation.
Option D: $530,000
This amount ($500,000) represents the total liabilities of the company, not the equity. This is a common error where students confuse total liabilities with owner's equity. The calculation stopped at determining total liabilities without subtracting from total assets.
Memory Technique
Remember 'ALE' - Assets minus Liabilities equals Equity. Think of it as 'After Liabilities, Equity' remains for the owners.
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