At year-end a firm has assets of $100 and debts due of $120. In this situation,the stockholders must pay an additional $20 out of their own pocket.

Question

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If a firm has assets of $100 and debts due of $120, it is insolvent and cannot pay its debts. In this situation, the stockholders do not have to personally pay any additional money out of their own pocket, unless they have guaranteed the debts of the firm. Instead, the debts must be resolved through a legal process such as bankruptcy or liquidation of assets.

At Year-End a Firm Has Assets of $100 and Debts