A Michigan contractor operates as a sole proprietorship and wants to convert to an LLC. The business has $150,000 in assets and $75,000 in liabilities. What is the owner's equity that will transfer to the new LLC?
Correct Answer
C) $75,000
Owner's equity = Assets - Liabilities = $150,000 - $75,000 = $75,000. This equity transfers to the LLC upon conversion.
Why This Is the Correct Answer
Owner's equity is calculated using the basic accounting equation: Assets − Liabilities = Owner's Equity. Here: $150,000 − $75,000 = $75,000. When converting to an LLC, the owner's equity (net worth of the business) carries over as the member's capital contribution in the new entity.
Why the Other Options Are Wrong
Option A: $100,000
$100,000 does not result from any standard accounting formula using the given figures. It may be a distractor formed by subtracting an arbitrary portion of liabilities or using incorrect arithmetic.
Option B: $150,000
$150,000 represents the total assets of the business, not the owner's equity. Equity is what remains after liabilities are subtracted from assets. Using total assets as equity ignores the $75,000 owed to creditors.
Option D: $50,000
$50,000 could result from incorrectly subtracting $100,000 (or some other figure) from $150,000. No standard accounting method produces this result from the given data ($150,000 assets, $75,000 liabilities).
Memory Technique
Memorize the accounting equation: Assets = Liabilities + Owner's Equity → rearranged: Owner's Equity = Assets − Liabilities. Use the acronym 'ALE' (Assets = Liabilities + Equity) to recall the relationship instantly.
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