Chapter 1, Problem 9E

a.

To determine

To compute: The value of equity.

Explanation of Solution

Given,
The value of asset of A Company is $300,000 in the beginning of year
During the year asset increase $80,000.
The value of equity of A Company is $100,000 in the beginning of year.
The increase in liability of A Company is $50,000 during the year.

The formula to calculate equity is,

$\text{Equity}=\text{Assets}-\text{Liabilities}$

Substitute $380,000 for assets and $250,000 for liabilities,

$\begin{array}{c}\text{Equity}=\$380,000-\$250,000\\ =\$130,000\end{array}$

Hence, the equity of A Company is $130,000.

Working Notes:

Calculation of change in equity due to increase in assets and liability

$\begin{array}{c}\text{Change in Equity}=\text{Change in Assets}-\text{Change in Liabilities}\\ =\$80,000-\$50,000\\ =\$30,000\end{array}$

Calculation of asset at the end of the year:

$\begin{array}{c}\text{Asset at the end}=\text{ Asset in the beggining}+\text{Addition during the year}\\ =\$300,000+\$80,000\\ =\$380,000\end{array}$

Calculation of liabilities in the beginning of the year:
$\begin{array}{c}\text{Liabilities in the beginning}=\left(\begin{array}{l}\text{Asset in the beggining }\\ -\text{Equity in the beginning}\end{array}\right)\\ =\$300,000-\$100,000\\ =\$200,000\end{array}$

Calculation of liabilities at the end of the year is:

$\begin{array}{c}\text{Liabilities at the end}=\text{ Liabilities in the beggining}+\text{Addition during the year}\\ =\$200,000+\$50,000\\ =\$250,000\end{array}$

b.

To determine

To compute: The value of equity.

Explanation of Solution

Given,
The value of asset of O is $123,000.
The value of liabilities of O is $47,000

The formula to calculate equity is,

$\text{Equity}=\text{Assets}-\text{Liabilities}$

Substitute $123,000 for assets and $47,000 for liabilities.

$\begin{array}{c}\text{Equity}=\$123,000-\$47,000\\ =\$76,000\end{array}$

Hence, the equity of O is $130,000.

c.

To determine

To compute: Beginning and ending amount of equity

Explanation of Solution

Given,
The value of liability of Q Company is $70,000 in the beginning of year,
During the year liability decrease $5,000.
The value of asset of Q Company is $190,000 at the end of year
Increase of $60,000 during the year.

The formula to calculate equity is,

$\text{Equity}=\text{Assets}-\text{Liabilities}$

Beginning equity

Substitute $130,000 for assets in the beginning of year and $70,000 for liabilities in the beginning of year,

$\begin{array}{c}\text{Equity}=\$130,000-\$70,000\\ =\$60,000\end{array}$

Ending equity

Substitute $190,000 for asset at the end and $65,000 for liabilities at the end in the above equation,

$\begin{array}{c}\text{Equity}=\$190,000-\$65,000\\ =\$125,000\end{array}$

Hence, the value of equity of the Q Company in the beginning of the year is $60,000 and at the end is $125,000

Working Notes:

Calculate value of asset in the beginning of year:

$\begin{array}{c}\text{Asset in the beggining}=\text{ Asset at the end}-\text{Addition during the year}\\ =\$190,000-\$60,000\\ =\$130,000\end{array}$

Calculation of change in equity due to increase in assets and liability

$\begin{array}{c}\text{Change in Equity}=\text{Increase in Assets}+\text{Decrease in Liabilities}\\ =\$60,000+\$5,000\\ =\$65,000\end{array}$

Calculation of Value of liabilities at the end is:

$\begin{array}{c}\text{Liabilities at the end}=\text{ Liabilities in the beggining}-\text{Decrease during the year}\\ =\$70,000-\$5,000\\ =\$65,000\end{array}$