The following table shows the balance sheet for Poor Baby Bank.

-Refer to the table above.What happens to stockholders' equity if there is an economic downturn and as a result,Poor Baby Bank loses 5 percent of its long-term investments and has to borrow another $10 from other banks?

Question

The following table shows the balance sheet for Poor Baby Bank.
 
-Refer to the table above.What happens to stockholders' equity if there is an economic downturn and as a result,Poor Baby Bank loses 5 percent of its long-term investments and has to borrow another $10 from other banks?

Quizplus · Accepted Answer

If Poor Baby Bank loses 5 percent of its long-term investments, its long-term investments value will decrease by (5% x $25) $1.25. Therefore, total assets will decrease to ($35 - $1.25) $33.75. If the bank borrows another $10 from other banks, its liabilities will increase to ($20 + $10) $30. 
Thus, stockholders' equity will be ($33.75(total assets) - $30(total liabilities)) $3.75. However, since the bank had a previous deficit of $2.50, the new stockholders' equity will be ($3.75 - $2.50) $1.25. Therefore, the correct answer is B.

The Following Table Shows the Balance Sheet for Poor Baby