Question

Who of the following people is most in danger of being personally bankrupt? Assume that all of their businesses' assets are highly liquid and can therefore be sold immediately.

Select one:

a. Alice has $5,000 cash, owes $20,000 credit card debt due immediately and 100% owns a sole tradership business with assets worth $30,000 and liabilities of $20,000.

b. Billy has $5,000 cash, lent $20,000 to his friend, and doesn't have any personal debt or own any businesses.

c. Carla has $5,000 cash, owes $10,000 credit card debt due immediately and 100% owns a corporate business with assets worth $20,000 and liabilities of $10,000.

d. Darren has $10,000 cash, owes $20,000 credit card debt due immediately and 100% owns a sole tradership business with assets worth $40,000 and liabilities of $10,000.

e. Ernie has $10,000 cash, owes $10,000 credit card debt due immediately and 100% owns a corporate business with assets worth $20,000 and liabilities of $40,000.

Answer 1

In case of sole tradeship business, proprietor liability is unlimited and therefore his personal assets can also be sold to recover dues whereas in case of corporate business, liability is limited to the extent of corporate assets and therefore personal assets of shareholder cannot be sold to recover dues.

Calculation of person who is most in danger of personally bankupt:

(a) Alice has sole proprietorship business, therefore his liability from business is unlimited but in given case net assets of Alice from business are positive. Calculation will be as follow:

Alice
Cash	$     5,000.00
Net Assets from Business                  ( 30000-20000)	$   10,000.00
Total Assets	$   15,000.00
Credit Card Due	$ -20,000.00
Excess Liability	$   -5,000.00

(b) Billy does not own any business and further his liability is also 0.

Calculation of Billy is as follow:

Billy
Cash	$     5,000.00
Money lent to friend	$   20,000.00
Total Assets	$   25,000.00
Liabilities	$                  -
Excess Assets	$   25,000.00

(c) Carla has corporate business and therefore his liability is limited. In the given case, net assets of corporate business are positive, it can be used for personal debt.

Calculation is as under:

Carla
Cash	$ 5,000.00
Net Assets from Business                  (20000-10000)	$10,000.00
Total Assets	$15,000.00
Credit Card Due	$ -10,000.00
Excess Assets	$5,000.00

(d) Darren has sole proprietorship business, therefore his liability from business is unlimited but in given case net assets of Darren from business are positive. Calculation will be as follow:

Darren
Cash	$   10,000.00
Net Assets from Business                  (40000-10000)	$30,000.00
Total Asstes	$40,000.00
Credit Card Due	$ -20,000.00
Excess Assets	$   20,000.00

(e) Ernie has corporate business and therefore his liability is limited. In the given case, net assets of corporate business are negative, but Ernie will not be personally liable for that.

Calculation of Ernie is as follow:

Ernie
Cash	$   10,000.00
Credit Card Due	$ -10,000.00
Excess Assets/ Liabilties	$                  -

Comparison Table

Name	Excess Assets/ (Liabilities)
Alice	$          -5,000.00
Billy	$          25,000.00
Carla	$            5,000.00
Darren	$          20,000.00
Ernie	-

Therefore Alice is in most danger of being bankrupt.