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The balance sheet of Blaze Limited is given below.                  Balance Sheet: Current YearAssets Amount Liabilities and Equity AmountMachinery $20,000.00 Share capital $10,000.00Inventory $2,000.00 Long-term debt $10,000.00Accounts receivable $1,000.00 Short-term debt $3,000.00Cash $2,000.00 Accounts payable $2,000.00Total assets $25,000.00 Total liabilities and equity $25,000.00Calculate the capital employed by the company.

Question

The balance sheet of Blaze Limited is given below.                  Balance Sheet: Current YearAssets Amount Liabilities and Equity AmountMachinery 20,000.00Sharecapital20,000.00 Share capital 10,000.00Inventory 2,000.00Longtermdebt2,000.00 Long-term debt 10,000.00Accounts receivable 1,000.00Shorttermdebt1,000.00 Short-term debt 3,000.00Cash 2,000.00Accountspayable2,000.00 Accounts payable 2,000.00Total assets 25,000.00Totalliabilitiesandequity25,000.00 Total liabilities and equity 25,000.00Calculate the capital employed by the company.

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Solution

Capital employed can be calculated in two ways:

  1. Total Assets - Current Liabilities
  2. Shareholders' Equity + Long-term Liabilities

Let's use both methods to calculate the capital employed by Blaze Limited.

Method 1: Total Assets - Current Liabilities Total Assets = 25,000.00CurrentLiabilities=Shorttermdebt+Accountspayable=25,000.00 Current Liabilities = Short-term debt + Accounts payable = 3,000.00 + 2,000.00=2,000.00 = 5,000.00 So, Capital Employed = Total Assets - Current Liabilities = 25,000.0025,000.00 - 5,000.00 = $20,000.00

Method 2: Shareholders' Equity + Long-term Liabilities Shareholders' Equity = Share capital = 10,000.00LongtermLiabilities=10,000.00 Long-term Liabilities = 10,000.00 So, Capital Employed = Shareholders' Equity + Long-term Liabilities = 10,000.00+10,000.00 + 10,000.00 = $20,000.00

So, the capital employed by Blaze Limited is $20,000.00.

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