Chapter 1, Problem 4BP

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 2012.

Incorporation JP
Balance sheet as on December 31, 2012
	Amount ($)		Amount ($)	Amount ($)
Assets		Liabilities
Cash	8,000	Accounts Payable	1,600
Accounts receivable	17,500	Notes Payable	25,000
Equipment, net	27,000	Total liabilities		26,600
Supplies	4,200	Stockholders' equity
		Common stock	5,000
		Retained earnings	25,100
		Total stockholders’ equity		30,100
Total assets	$56,700	Total liabilities and stockholders’ equity		$56,700

Table (1)

Prepare a balance sheet as of December 31 of the Year 2013.

Incorporation JP
Balance sheet as on December 31, 2013
	Amount ($)		Amount ($)	Amount ($)
Assets		Liabilities
Cash	10,000	Accounts Payable	1,800
Accounts receivable	22,800	Notes Payable	25,000
Equipment, net	32,000	Total liabilities		26,800
Supplies	4,700	Stockholders' equity
		Common stock	5,000
		Retained earnings	37,700
		Total stockholders’ equity		42,700
Total assets	$69,500	Total liabilities and stockholders’ equity		$69,500

Table (2)

Working notes:

Calculate the retained earnings for the year 2012.

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

$\begin{array}{c}\left(\begin{array}{l}\$8,000+\$17,500\\ +\$27,000+\$4,200\end{array}\right)=\left(\begin{array}{l}\$1,600\\ +\$25,000\end{array}\right)+\left(\begin{array}{l}\$5,000\\ +\text{Retained earnings}\end{array}\right)\\ \$56,700=\$26,600+\$5,000+\text{Retained earnings}\\ \$56,700=\text{\$31,600 }+\text{Retained earnings}\end{array}$

$\begin{array}{l}\text{Retained earnings}=\$56,700-\text{\$31,600}\\ \text{Retained earnings}=\$25,100\end{array}$

Calculate the retained earnings for the year 2013.

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

$\begin{array}{c}\left(\begin{array}{l}\$10,000+\$22,800\\ +\$32,000+\$4,700\end{array}\right)=\left(\begin{array}{l}\$1,800\\ +\$25,000\end{array}\right)+\left(\begin{array}{l}\$5,000\\ +\text{Retained earnings}\end{array}\right)\\ \$69,500=\$26,800+\$5,000+\text{Retained earnings}\\ \$69,500=\text{\$31,800 }+\text{Retained earnings}\end{array}$

$\begin{array}{l}\text{Retained earnings}=\$69,500-\text{\$31,800}\\ \text{Retained earnings}=\$37,700\end{array}$

b.

To determine

Prepare a statement of stockholders’ equity for 2013.

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 2013.

Incorporation JP
Statement of stockholders' equity
For the year ended December 31, 2013
Particulars	Amount ($)
Retained Earnings, Beginning (Refer Table (1))	25,100
Add: Net income	24,600
	49,700
Less: Dividends	12,000
Retained Earnings, Ending (Refer Table (2))	$37,700

Table (3)

Working note:

Calculate the net income.

$\begin{array}{c}\left(\begin{array}{l}\text{Retained earnings }\left(\text{Beginning}\right)\\ +\text{ Net income }-\text{Dividends}\end{array}\right)=\text{ Retained earnings }\left(\text{Ending}\right)\\ \$25,100+\text{Net income }-\text{ \$12,000}=\$37,700\\ \text{Net income}=\$37,700-\$25,100+\$12,000\\ \text{Net income}=\$24,600\end{array}$