Chapter 1, Problem 2AP

Computing missing information using accounting knowledge

The following financial statement information is from five separate companies.

Required

1. Answer the following questions about Company A.

  a. What is the amount of equity on December 31, 2018?

  b. What is the amount of equity on December 31, 2019?

  c. What is the amount of liabilities on December 3 I, 2019?

2. Answer the following questions about Company B.

  a. What is the amount of equity on December 31, 2018?

  b. What is the amount of equity on December 31, 2019?

  c. What is net income for year 2019?

3. Compute the amount of assets for Company Con December 31,2019.

4. Compute the amount of owner investments for Company D during year 2019.

5. Compute the amount of liabilities for Company Eon December 31, 20 I 8.

To determine

Calculate (a) the value of equity on December 31, 2018 (b) value of equity on December 31, 2019 (c) value of liabilities on December 31, 2019 for Company A.

Explanation of Solution

Liabilities:

Liabilities are an obligation of the business to pay to the creditors in future for the goods and services purchased on account or any for other financial benefit received. It can be current liabilities or a non-current liabilities depending upon the time period in which it is paid.

(a)

Calculate the value of equity on December 31, 2018.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2018}\end{array}\}=\text{Value of assets}-\text{Value of liabilities}\\ =\$55,000-\$24,500\\ =\$30,500\end{array}$

Therefore, the value of equity as on December 31, 2018 is $30,500.

(b)

Calculate the value of equity on December 31, 2019.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2019}\end{array}\}=\left(\begin{array}{l}\text{Value of equity as on December 31,2016}+\\ \text{Investment by owner}+\text{Net income}-\text{Owner withdrawals}\end{array}\right)\\ =\$30,500+\$6,000+\$8,500-\$3,500\\ =\$41,500\end{array}$

Therefore, the value of equity as on December 31, 2019 is $41,500.

(c)

Calculate the value of liabilities on December 31, 2019.

$\begin{array}{c}\begin{array}{l}\text{Value of liabilties as on }\\ \text{December 31,2019}\end{array}\}=\text{Value of assets-Value of equity}\\ =\$58,000-\$41,500\\ =\$16,500\end{array}$

Therefore, the value of liabilities as on December 31, 2019 is $16,500.

To determine

Calculate (a) the value of equity on December 31, 2018 (b) value of equity on December 31, 2019 (c) value of net income for the year 2019 for Company B.

Explanation of Solution

(a)

Calculate the value of equity on December 31, 2018.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2018}\end{array}\}=\text{Value of assets}-\text{Value of liabilities}\\ =\$34,000-\$21,500\\ =\$12,500\end{array}$

Therefore, the value of equity as on December 31, 2018 is $12,500.

(b)

Calculate the value of equity on December 31, 2019.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2019}\end{array}\}=\text{Value of assets}-\text{Value of liabilities}\\ =\$40,000-\$26,500\\ =\$13,500\end{array}$

Therefore, the value of equity as on December 31, 2019 is $13,500.

(c)

Calculate the value of net income for the year 2019 for Company B.

$\begin{array}{c}\begin{array}{l}\text{Value of net income for }\\ \text{the year 2019}\end{array}\}=\left(\begin{array}{l}\text{Value of equity as on December 31,2018}+\\ \text{Investment by owner}+\text{Net income}-\text{Withdrawals}\text{by}\text{owner}-\\ \text{Value of equity as on December 31,2019}\end{array}\right)\\ =\$12,500+1,400+\text{Net}\text{income}-\$2,000-\$13,500\\ =\$1,600\end{array}$

Therefore, net income of Company B reported an amount of $1,600 during the year 2019.

To determine

Calculate (a) the value of assets on December 31, 2019 for Company C.

Explanation of Solution

Calculate the value of assets on December 31, 2019 for Company C.

$\begin{array}{c}\begin{array}{l}\text{Value of assets as on }\\ \text{December 31,2019}\end{array}\}=\text{Value of liabilties }-\text{Value of equity (2)}\\ =\$29,000+\$26,875\\ =\$55,875\end{array}$

Therefore, the value of assets as on December 31, 2019 is $55,875.

Working notes:

Calculate the value of equity on December 31, 2018 of Company C.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2018}\end{array}\}=\text{Value of assets}-\text{Value of liabilities}\\ =\$24,000-\$9,000\\ =\$15,000\end{array}$ (1)

Calculate the ending balance of equity of Company C.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2019}\end{array}\}=\left(\begin{array}{l}\text{Value of equity as on December 31,2018 (1)}+\\ \text{Investment by owner}+\text{Net income}-\text{Owner withdrawals}\end{array}\right)\\ =\$15,000+\$9,750+\$8,000-\$5,875\\ =\$26,875\end{array}$ (2)

To determine

Calculate the Value of stock issuance during the year 2019 for Company D.

Explanation of Solution

Calculate the value of stock issuance of Company D for the year 2019.

$\begin{array}{c}\begin{array}{l}\text{Value of stock issuance for }\\ \text{the year 2019}\end{array}\}=\left(\begin{array}{l}\text{Value of equity as on December 31,2019}-\\ \text{investment by owner}-\text{Net income}-\\ \text{Value of equity as on December 31,2018}\end{array}\right)\\ =\$61,000(4)-\$0-\$14,000-\$20,000(3)\\ =\$27,000\end{array}$

Therefore, stock issuance of Company D reported an amount of $27,000 during the year 2018.

Working notes:

Calculate the value of equity on December 31, 2018 of Company D.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2018}\end{array}\}=\text{Value of assets}-\text{Value of liabilities}\\ =\$60,000-\$40,000\\ =\$20,000\end{array}$ (3)

Calculate the ending balance of equity of Company D.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2019}\end{array}\}=\text{Value of assets}-\text{Value of liabilities}\\ =\$85,000-\$24,000\\ =\$61,000\end{array}$ (4)

To determine

Calculate the value of liabilities for December 31, 2018 for Company E.

Explanation of Solution

Calculate the value of liabilities of Company E for December 31, 2016.

$\begin{array}{c}\begin{array}{l}\text{Value of liabilties as on }\\ \text{December 31,2018}\end{array}\}=\text{Value of assets}-\text{Value of equity}\\ =\$119,000-\$27,500(6)\\ =\$91,500\end{array}$

Therefore, the value of liabilities as on December 31, 2018 is $91,500.

Working notes:

Calculate the value of equity on December 31, 2019.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2019 for Company E}\end{array}\}=\text{Value of assets}-\text{Value of liabilities}\\ =\$113,000-\$70,000\\ =\$43,000\end{array}$ (5)

Calculate the ending balance of equity.

$\begin{array}{c}\begin{array}{l}\text{Beginning balance of equity as on }\\ \text{December 31,2018 of Company E}\end{array}\}=\left(\begin{array}{l}\text{Value of equity as on December 31,2019 (5)}-\\ \text{Withdrawals by owner}-\text{Net income}-\text{Investment by owner}\end{array}\right)\\ =\$43,000-\$11,000-\$20,000-\$6,500\\ =\$27,500\end{array}$ (6)