Chapter 1, Problem 2AP

1.

To determine

Calculate (a) the value of equity on December 31, 2016 (b) value of equity on December 31, 2017 (c) value of liabilities on December 31, 2017 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, 2016.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2016}\end{array}\}=\text{Value of assets - Value of liabilities}\\ \text{=\$55,000}-\$24,500\\ =\$30,500\end{array}$

Therefore, the value of equity as on December 31, 2016 is $30,500.

(b)

Calculate the value of equity on December 31, 2017.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2017}\end{array}\}=\left(\begin{array}{l}\text{Value of equity as on December 31,2016 + }\\ \text{Stock issuances + Net income- Cash dividends}\end{array}\right)\\ =\$30,500+\$6,000+\$8,500-\$3,500\\ =\$41,500\end{array}$

Therefore, the value of equity as on December 31, 2017 is $41,500.

(c)

Calculate the value of liabilities on December 31, 2017.

$\begin{array}{c}\begin{array}{l}\text{Value of liabilties as on }\\ \text{December 31,2017}\end{array}\}=\text{Value of assets - Value of equity}\\ =\$58,000-\$41,500\\ =\$16,500\end{array}$

Therefore, the value of liabilities as on December 31, 2017 is $16,500.

2.

To determine

Calculate (a) the value of equity on December 31, 2016 (b) value of equity on December 31, 2017 (c) value of net income for the year 2017 for Company B.

Explanation of Solution

(a)

Calculate the value of equity on December 31, 2016.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2016}\end{array}\}=\text{Value of assets - Value of liabilities}\\ \text{=\$34,000}-\$21,500\\ =\$12,500\end{array}$

Therefore, the value of equity as on December 31, 2016 is $12,500.

(b)

Calculate the value of equity on December 31, 2017.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2017}\end{array}\}=\text{Value of assets - Value of liabilities}\\ \text{=\$40,000}-\$26,500\\ =\$13,500\end{array}$

Therefore, the value of equity as on December 31, 2017 is $13,500.

(c)

Calculate the value of net income for the year 2017 for Company B.

$\begin{array}{c}\begin{array}{l}\text{Value of net income for }\\ \text{the year 2017}\end{array}\}=\left(\begin{array}{l}\text{Value of equity as on December 31,2017 + }\\ \text{Cash dividends }-\text{Stock issuances }-\\ \text{Value of equity as on December 31,2016}\end{array}\right)\\ =\$13,500+2,000-\$1,400-\$12,500\\ =\$1,600\end{array}$

Therefore, net income of Company B reported an amount of $1,600 during the year 2017.

3.

To determine

Calculate (a) the value of assets on December 31, 2017 for Company C (b) value of stock issuance during the year 2017 for Company D (c) value of liabilities for December 31, 2016 for Company E.

Explanation of Solution

(a)

Calculate the value of assets on December 31, 2017 for Company C.

$\begin{array}{c}\begin{array}{l}\text{Value of assets as on }\\ \text{December 31,2017}\end{array}\}=\text{Value of liabilties - Value of equity (2)}\\ \text{=\$29,000+\$26,875}\\ =\$55,875\end{array}$

Therefore, the value of assets as on December 31, 2017 is $55,875.

Working notes:

Calculate the value of equity on December 31, 2016 of Company C.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2016}\end{array}\}=\text{Value of assets - Value of liabilities}\\ \text{=\$24,000}-\$9,000\\ =\$15,000\end{array}$ (1)

Calculate the ending balance of equity of Company C.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2017}\end{array}\}=\left(\begin{array}{l}\text{Value of equity as on December 31,2016 (1) + }\\ \text{Stock issuances + Net income- Cash dividends}\end{array}\right)\\ =\$15,000+\$9,750+\$8,000-\$5,875\\ =\$26,875\end{array}$ (2)

(b)

Calculate the value of stock issuance of Company D for the year 2017.

$\begin{array}{c}\begin{array}{l}\text{Value of stock issuance for }\\ \text{the year 2017}\end{array}\}=\left(\begin{array}{l}\text{Value of equity as on December 31,2017 + }\\ \text{Cash dividends }-\text{Net income }-\\ \text{Value of equity as on December 31,2016}\end{array}\right)\\ =\$61,000(4)-\$0-\$14,000-\$20,000(3)\\ =\$27,000\end{array}$

Therefore, stock issuance of Company D reported an amount of $27,000 during the year 2017.

Working notes:

Calculate the value of equity on December 31, 2016 of Company D.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2016}\end{array}\}=\text{Value of assets - Value of liabilities}\\ \text{=\$60,000}-\$40,000\\ =\$20,000\end{array}$ (3)

Calculate the ending balance of equity of Company D.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2017}\end{array}\}=\text{Value of assets - Value of liabilities}\\ \text{=\$85,000}-\$24,000\\ =\$61,000\end{array}$ (4)

(c)

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

$\begin{array}{c}\begin{array}{l}\text{Value of liabilties as on }\\ \text{December 31,2016}\end{array}\}=\text{Value of assets - Value of equity}\\ =\$119,000-\$27,500(6)\\ =\$91,500\end{array}$

Therefore, the value of liabilities as on December 31, 2016 is $91,500.

Working notes:

Calculate the value of equity on December 31, 2017.

$\begin{array}{c}\begin{array}{l}\text{Value of equity as on }\\ \text{December 31,2017 for Company E}\end{array}\}=\text{Value of assets - Value of liabilities}\\ \text{=\$113,000}-\$70,000\\ =\$43,000\end{array}$ (5)

Calculate the ending balance of equity.

$\begin{array}{c}\begin{array}{l}\text{Beginning balance of equity as on }\\ \text{December 31,2016 of Company E}\end{array}\}=\left(\begin{array}{l}\text{Value of equity as on December 31,2017 (5) }-\\ \text{Cash dividends}-\text{ Stock issuances }-\text{ Net income}\end{array}\right)\\ =\$43,000+\$11,000-\$20,000-\$6,500\\ =\$27,500\end{array}$ (6)