Chapter 1, Problem 4AP

a.

To determine

Prepare a balance sheet as of December 31 of each year.

Explanation of Solution

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare a balance sheet as of December 31 of the Year 2015.

Incorporation LJ
Balance sheet as on December 31, 2015
	Amount ($)		Amount ($)	Amount ($)
Assets		Liabilities
Cash	22,000	Accounts Payable	9,000
Accounts receivable	31,000	Mortgage Payable	103,000
Land	46,000	Total liabilities		112,000
Building, net	260,000	Stockholders' equity
Equipment, net	46,000	Common stock	225,000
Supplies	16,000	Retained earnings	79,000	304,000
		Total stockholders’ equity
Total assets	$416,000	Total liabilities and stockholders’ equity		$416,000

Table (1)

Prepare a balance sheet as of December 31 of the Year 2016.

Incorporation LJ
Balance sheet as on December 31, 2016
	Amount ($)		Amount ($)	Amount ($)
Assets		Liabilities
Cash	25,000	Accounts Payable	6,000
Accounts receivable	39,000	Mortgage Payable	93,000
Land	46,000	Total liabilities		99,000
Building, net	250,000	Stockholders' equity
Equipment, net	44,000	Common stock	225,000
Supplies	18,000	Retained earnings	98,000
		Total stockholders’ equity		323,000
Total assets	$422,000	Total liabilities and stockholders’ equity		$422,000

Table (2)

Working notes:

Calculate the retained earnings for the year 2015.

$\begin{array}{c}\text{Assets }=\text{ Liabilities }+\text{ Stockholders’ equity}\\ \left(\begin{array}{c}\text{Cash +Accounts receivable}\\ \text{Land +Building, net +}\\ \text{Equipment, net + Supplies }\end{array}\right)=\left(\begin{array}{l}\text{Accounts payable+}\\ \text{Mortgage Payable}\end{array}\right)+\left(\begin{array}{l}\text{Common stock }\\ +\text{ Retained earnings }\end{array}\right)\end{array}$

$\begin{array}{c}\left(\begin{array}{l}\$22,000+\$31,000\\ +\$46,000+\$260,000\\ +\$46,000+\$16,000\end{array}\right)=\left(\begin{array}{l}\$9,000\\ +\$103,000\end{array}\right)+\left(\begin{array}{l}\$225,000\\ +\text{Retained earnings}\end{array}\right)\\ \$421,000=\$112,000+\$225,000+\text{Retained earnings}\\ \$416,000=\text{\$337,000 +Retained earnings}\end{array}$

$\begin{array}{l}\text{Retained earnings}=\$416,000-\text{\$337,000}\\ \text{Retained earnings}=\$79,000\end{array}$

Calculate the retained earnings for the year 2016.

$\begin{array}{c}\text{Assets }=\text{ Liabilities }+\text{ Stockholders’ equity}\\ \left(\begin{array}{c}\text{Cash +Accounts receivable}\\ \text{Land +Building, net +}\\ \text{Equipment, net + Supplies }\end{array}\right)=\left(\begin{array}{l}\text{Accounts payable+}\\ \text{Mortgage Payable}\end{array}\right)+\left(\begin{array}{l}\text{Common stock }\\ +\text{ Retained earnings }\end{array}\right)\end{array}$

$\begin{array}{c}\left(\begin{array}{l}\$25,000+\$39,000\\ +\$46,000+\$250,000\\ +\$44,000+\$18,000\end{array}\right)=\left(\begin{array}{l}\$6,000\\ +\$93,000\end{array}\right)+\left(\begin{array}{l}\$225,000\\ +\text{Retained earnings}\end{array}\right)\\ \$422,000=\$99,000+\$225,000+\text{Retained earnings}\\ \$422,000=\text{\$324,000 +Retained earnings}\end{array}$

$\begin{array}{l}\text{Retained earnings}=\$422,000-\text{\$324,000}\\ \text{Retained earnings}=\$98,000\end{array}$

b.

To determine

Prepare a statement of stockholders’ equity for 2016.

Explanation of Solution

Statement of stockholder’ equity:

This statement reports the beginning stockholders’ equity and all the changes, which led to ending stockholders’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning stockholders’ equity to arrive at the result, ending stockholders’ equity.

Prepare a statement of stockholders’ equity for 2016.

Incorporation LJ
Statement of stockholders' equity
For the year ended December 31, 2016
Particulars	Amount ($)
Retained Earnings, Beginning (Refer Table (1))	79,000
Add: Net income	39,000
	118,000
Less: Dividends	20,000
Retained Earnings, Ending (Refer Table (2))	$98,000

Table (3)

Working note:

Calculate the net income.

$\begin{array}{c}\left(\begin{array}{l}\text{Retained earnings, Beginning }\\ \text{+ Net income –Dividends}\end{array}\right)\text{ = Retained earnings, Ending}\\ \$79,000+\text{Net income – \$20,000}=\$98,000\\ \text{Net income}=\$98,000-\$79,000+\$20,000\\ \text{Net income}=\$39,000\end{array}$