Assume Kennedy Company Acquires $1,400 Cash From Creditor

Assume That Kennedy Company Acquires 1400 Cash From Creditors And 3

Assume that Kennedy Company acquires $1,400 cash from creditors and $3,000 cash from investors. Required: (b) If Kennedy has a net loss of $1,400 cash and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive? (Omit the "$" sign in your response.) Cash received by creditors Cash received by investors (c) If Kennedy has net income of $1,400 and then liquidates, what amount of cash will the creditors receive? What amount of cash will the investors receive? (Omit the "$" sign in your response.) Cash received by creditors Cash received by investors

Paper For Above instruction

In analyzing the liquidation outcomes for Kennedy Company based on different financial scenarios, it’s essential to understand the principles of creditor and investor claims, especially during dissolution. The key here involves assessing how cash distributions are made to creditors and investors when the company either incurs a net loss or earns net income upon liquidation.

The initial details indicate that Kennedy Company has acquired cash from two main sources: $1,400 from creditors and $3,000 from investors. This suggests the company's initial capital structure involved debt (liabilities) and equity (investors). When considering liquidation, the order of claims follows legal and contractual priorities: creditors typically have precedence over investors, receiving their due before any residual is allocated to shareholders or owners.

Let’s evaluate each scenario separately.

Scenario 1: Net loss of $1,400 cash and liquidation

When Kennedy incurs a net loss of $1,400 upon liquidation, this indicates that the company's assets are insufficient to cover its liabilities fully. Assuming the cash flows are directly related to the liquidation process, the total cash available for distribution is limited to the initial cash acquired, which totals $4,400 ($1,400 from creditors and $3,000 from investors).

However, in the scenario of a net loss, the company's operations or asset liquidation generates less cash than liabilities owed, or the loss signifies negative cash flows during liquidation. Nonetheless, the sum of cash available for distribution remains at $4,400 unless additional liabilities or expenses are involved, which are not specified here.

Given the priority of claims, creditors are entitled to their full $1,400 before any distribution to investors. Since the total cash available ($4,400) exceeds the creditor claim of $1,400, creditors will receive the full amount owed to them. The remaining $3,000, representing the investors' contribution, will also be fully returned unless otherwise constrained by the company's assets or legal claims.

Therefore, in a liquidation where a net loss occurs, creditors receive $1,400, and investors receive $3,000, reflecting their initial contributions. The fact that there's a net loss does not alter their entitlement to the initial cash provided unless specific contractual or legal provisions limit distributions in loss scenarios.

Scenario 2: Net income of $1,400 and liquidation

In the case where Kennedy reports a net income of $1,400 before liquidation, the cash position upon liquidation is similarly considered based on the cash initially acquired, assuming no additional cash flows or asset sales change the total available. The total cash accessible remains $4,400, and the priority of claims remains unchanged.

Since the company's profitability does not directly impact the distribution of cash in liquidation, unless it results in retained earnings or assets to distribute, the cash available for creditors and investors remains proportional to their initial contributions. Creditors will still receive their $1,400, as they are typically paid before any distributions to investors. The investors, who initially provided $3,000, are entitled to the residual amount after creditors are paid.

In a straightforward liquidation scenario with available cash, creditors would receive $1,400, and investors would receive the remaining $3,000. The positive net income does not necessarily change the cash distribution unless the company's assets upon liquidation include accumulated earnings or additional cash flows, which are not indicated here.

Summary of Cash Distributions

• In the loss scenario, creditors receive 1400, investors receive 3000.
• In the net income scenario, creditors receive 1400, investors receive 3000.

These distributions reflect the initial cash contributions and the priority of claims during liquidation. Since the total cash amounts from the initial acquisition are sufficient to cover both claims entirely, both creditors and investors will receive their full amounts in either scenario.

References

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