Martha's Enterprises spent €2,400 to purchase equipment three years ago.This equipment is currently valued at €1,800 on today's statement of ﬁnancial position but could actually be sold for €2,000.Net working capital is €200
And non-current liabilities is €800.Assuming the equipment is the ﬁrm's only non-current asset, what is the book Value of shareholders' equity?

Question

Quizplus · Accepted Answer

The book value of the equipment can be calculated as: Purchase price - Accumulated depreciation. 
Since the equipment was purchased three years ago, we can assume that it has been depreciated over its useful life, which could be determined from additional information. However, we are not given any information about the method of depreciation or the useful life, so we cannot calculate the accumulated depreciation directly.

Instead, we can use the information provided to estimate the accumulated depreciation. We know that the equipment is currently valued at €1,800 on today's statement of financial position but could actually be sold for €2,000. This means that the equipment has been depreciated by €200 (€2,000 - €1,800) since it was purchased.

Therefore, the book value of the equipment is €2,400 - €200 = €2,200.

The total liabilities of the firm are €800, and the net working capital is €200. Therefore, the book value of shareholders' equity is:

Book value of shareholders' equity = Total assets - Total liabilities 
Book value of shareholders' equity = (Equipment) + (Net working capital) - (Non-current liabilities) 
Book value of shareholders' equity = €2,200 + €200 - €800 
Book value of shareholders' equity = €1,600

Therefore, the correct answer is (C) €1,200.

Martha's Enterprises Spent €2,400 to Purchase Equipment Three Years Ago