Compute the value of the bank's capital and enter it in the balance sheet. Then answer the question that follows. Balance sheet of Main Street Bank as of January 4, 2015 Assets Liabilities Reserves $110,000 Checkable deposits $5,210,000 Securities $1,100,000 Loans $4,400,000 Bank's capital (net worth) $ Total $5,610,000 Total $5,610,000 Suppose it turns out that a borrower defaults on a $75,000 loan, and the collateral offered to get the loan is worthless. This will the loans outstanding portion of Main Street Bank's balance sheet, and it will the bank's capital to $ . In this situation, the bank is .

Please refer to Explanation.

Explanation:

In this scenario the bank capital needs to be calculated to show if the default will make the bank insolvent. If the default exceeds the bank capital then the bank will bw insolvent.

Capital = Assets - Liabilities.

In a bank, checkable deposits are treated as liabilities because they represent the amount the bank owes to it's customer.

Capital = 5,610,000 - 5,210,000

Capital = $400,000

1. ..This will the..

- DECREASE

The loan Outstanding portion will decrease because the borrower defaulted and the bank cannot seem to get the loan back.

2. ...and it will the bank's

- DECREASE

When a loan is defaulted on, it has to be taken from the bank's capital.

That means that the bank's capital reduces by,

= 400,000 - 75,000

= $325,000

3. In this situation, the bank is .

- SOLVENT

When the capital is still positive then the entity is said to be solvent.

If the bank's capital had gone to the negative, it would be insolvent.

Take care to check the figures for the Checkable deposits amount for such questions to enable you find the bank Capital because such questions are usually aimed at proving that the bank is now insolvent.

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