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 2015.

Incorporation JP
Balance sheet as on December 31, 2015
	Amount ($)		Amount ($)	Amount ($)
Assets		Liabilities
Cash	12,000	Accounts Payable	2,600
Accounts receivable	19,500	Notes Payable	21,000
Equipment, net	28,000	Total liabilities		23,600
Supplies	5,200	Stockholders' equity
		Common stock	6,000
		Retained earnings	35,100
		Total stockholders’ equity		41,100
Total assets	$64,700	Total liabilities and stockholders’ equity		$64,700

Table (1)

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

Incorporation JP
Balance sheet as on December 31, 2016
	Amount ($)		Amount ($)	Amount ($)
Assets		Liabilities
Cash	11,000	Accounts Payable	2,800
Accounts receivable	23,800	Notes Payable	21,000
Equipment, net	33,000	Total liabilities		23,800
Supplies	5,700	Stockholders' equity
		Common stock	6,000
		Retained earnings	43,700
		Total stockholders’ equity		49,700
Total assets	$73,500	Total liabilities and stockholders’ equity		$73,500

Table (2)

Working notes:

Calculate the retained earnings for the year 2015.

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

$\begin{array}{c}\left(\begin{array}{l}\$12,000+\$19,500\\ +\$28,000+\$5,200\end{array}\right)=\left(\begin{array}{l}\$2,600\\ +\$21,000\end{array}\right)+\left(\begin{array}{l}\$6,000\\ +\text{Retained earnings}\end{array}\right)\\ \$64,700=\$23,600+\$6,000+\text{Retained earnings}\\ \$64,700=\text{\$29,600 }+\text{Retained earnings}\end{array}$

$\begin{array}{l}\text{Retained earnings}=\$64,700-\text{\$29,600}\\ \text{Retained earnings}=\$35,100\end{array}$

Calculate the retained earnings for the year 2016.

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

$\begin{array}{c}\left(\begin{array}{l}\$11,000+\$23,800\\ +\$33,000+\$5,700\end{array}\right)=\left(\begin{array}{l}\$2,800\\ +\$21,000\end{array}\right)+\left(\begin{array}{l}\$6,000\\ +\text{Retained earnings}\end{array}\right)\\ \$73,500=\$23,800+\$6,000+\text{Retained earnings}\\ \$73,500=\text{\$29,800 }+\text{Retained earnings}\end{array}$

$\begin{array}{l}\text{Retained earnings}=\$73,500-\text{\$29,800}\\ \text{Retained earnings}=\$43,700\end{array}$

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 JP
Statement of stockholders' equity
For the year ended December 31, 2016
Particulars	Amount ($)
Retained Earnings, Beginning (Refer Table (1))	35,100
Add: Net income	21,600
	56,700
Less: Dividends	13,000
Retained Earnings, Ending (Refer Table (2))	$43,700

Table (3)

Working note:

Calculate the net income.

$\begin{array}{c}\left(\begin{array}{l}\text{Retained earnings }\left(\text{Beginning}\right)\\ +\text{ Net income }-\text{Dividends}\end{array}\right)=\text{ Retained earnings }\left(\text{Ending}\right)\\ \$35,100+\text{Net income }-\text{ \$13,000}=\$43,700\\ \text{Net income}=\$43,700-\$35,100+\$13,000\\ \text{Net income}=\$21,600\end{array}$