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EXERCISE 1-2a. Investors put assets into the company with the expectation of sharing profits. Creditors lend assets to the company with the expectation of repayment of the principal plus interest on the loan.b. Kennedy CompanyAccounting EquationEventAssets=Liabilities +Stockholders' EquityCashNotes PayableCommon StockRetained EarningsAcquired assets$3,400$1,600$1,800Incurred loss(1,600)(1,600)Balance$1,800=$1,600+$1,800$(1,600)The cash balance of $1,800 will be distributed first to the creditors. Since the company owed $1,600 to creditors and there are sufficient funds to pay them, the creditors will receive $1,600. The investors will receive the balance of $200.c. Kennedy CompanyAccounting EquationEventAssets=Liabilities +Stockholders' EquityCashNotes PayableCommon StockRetained EarningsAcquired assets$3,400$1,600$1,800earned profit1,6001,600Balance$5,000=$1,600+$1,800$1,600The creditor will receive the $1,600 that is owed to them. The stockholders will receive their initial investment of $1,800 plus an additional $1,600 of profit for a total of $3,400.EXERCISE 1-4EntitiesDistribution of CashMr. Chang (personal account)Personal account was decreased by the $30,000 cash deposited in the Chang Enterprises' business account.Chang EnterprisesCash account increased by the $30,000 cash deposited by Mr. Chang.Cash account increased by $40,000 cash borrowed from First Bank.C

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