25-87 What will be the amount of equity on the balance sheet of Good Bank after the sale of the loans?

Question

Quizplus · Accepted Answer

The amount of equity on the balance sheet of Good Bank will decrease by the amount of the losses from the sold loans. From the information given in the question, we know that the loans were sold for $1,000, but had a book value of $1,200. This means that Good Bank incurred a loss of $200 on the sale ($1,000 - $1,200 = -$200). Since the bank has a leverage ratio of 10, this $200 loss would reduce equity by $20 ($200 ÷ 10). Therefore, the new amount of equity on the balance sheet would be $132 ($152 - $20 = $132). The correct answer is C.

25-87 What Will Be the Amount of Equity on the Balance