Chapter 1, Problem 2PSA

To determine

Financial Statement:

The Financial statement is the part of final accounts of the company. The primary books of accounts like journal, ledgers are not presentable in front of users that are why the accountant of the company will prepare financial statements. The financial statement only records the quantitative information instead of qualitative one.

Accounting Equation:

The assets, liabilities and equity relation, are known as the accounting equation. Assets are the resources of company and that increase as business expand whereas liabilities are the burden on company that has to pay in future; Equity means the owner claim on assets. An accounting equation represent the assets of the company are equal to the liabilities and equity of the company.

In can be represented as follow:

  $$

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

Assets:

Assets are the resources that a company needs to run the business. An asset is economic resources of the company.

Liabilities:

Liabilities are generally the amount owned by the company from lenders, suppliers, or bank. Liabilities are the burden on the company that they have to pay to others.

Equity:

The Company needs finance to run the business. Equity is one of the method through which the company raise the capital.

Net Income:

Total earning of the company is called net income of the company. When the total expense deducted from the total revenue than the resultant is net income or ne loss.Net profit of the company is also called net profit. The investor can take a decision on the basis of net income of the company. If net income is more the investor attract to the company.

1.

a.

To compute: The amount of equity, of A Company as on December 31, 2016.

Explanation of Solution

Given,

The amount of assets is $55,000.

The amount of liabilities is $24,500.

Formula to calculate equity is,

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

Substitute$55,000 for assets and $24,500 for liabilities.

  $\begin{array}{c}\text{Equity}=\$55,000-\$24,500\\ =\$30,500\end{array}$

Hence, the amount of equity of A Company as on December 31, 2016 is $30,500.

b.

To determine

To compute: The amount of equity, of A Company as on December 31, 2017.

Explanation of Solution

Given,

The amount of assets is $58,000.

The amount of equity is $30,500.

Stock issuance is $6,000.

Net income is $8,500.

Cash dividend is $3,500.

Formula to calculate equity is,

  $\text{Equity at the end}=\left(\begin{array}{l}\text{Equity in the beginning}+\text{Issue of stock}\\ +\text{Net income}-\text{Dividend}\end{array}\right)$

Substitute $30,500 for equity in the beginning,, $6,000 for issue of stock, $8,500 for net income, $3,500 for dividend.

  $\begin{array}{c}\text{Equity at the end}=\$30,500+\$6,000+\$8,500-\$3,500\\ =\$45,000-\$3,500\\ =\$41,500\end{array}$

Hence, the amount of equity of A company as on December 31, 2017 is $41,500.

c.

To determine

To compute: The amount of liabilities, of A Company as on December 31, 2017.

Explanation of Solution

Given,

The amount of assets is $58,000.

The amount of equity is $41,500.

Formula to calculate liabilities is,

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

Substitute $58,000 for assets and $41,500 for equity.

  $\begin{array}{c}\text{Liabilities}=\$58,000-\$41,500\\ =\$16,500\end{array}$

Hence, the amount of liabilities of A company as on December 31, 2017 is $16,500.

d.

To determine

To compute: The amount of equity, of B Company as on December 31, 2016.

Explanation of Solution

Given:

The amount of assets is $34,000.

The amount of liabilities is $21,500.

Formula to calculate equity is,

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

Substitute $34,000 for assets and $21,500 for liabilities.

  $\begin{array}{c}\text{Equity}=\$34,000-\$21,500\\ =\$12,500\end{array}$

Hence, the amount of equity of B Company as on December 31, 2016 is $12,500.

e.

To determine

To compute: The amount of equity, of B Company as on December 31, 2017.

Explanation of Solution

Given,

The amount of assets is $40,000.

The amount of liabilities is $26,500.

Formula to calculate equity is,

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

Substitute$40,000 for assets and $26,500 for liabilities.

  $\begin{array}{c}\text{Equity}=\$40,000-\$26,500\\ =\$13,500\end{array}$

Hence, the amount of equity of B Company as on December 31, 2017 is $13,500.

f.

To determine

To compute: The net income, of A Company as on December 31, 2017.

Explanation of Solution

Given:

The amount of equity is $12,500 of December 31, 2016.

The amount of equity is $13,500 of December 31, 2017.

Stock issuance is $1,400

Cash dividend is $2,000

Formula to calculate net income is,

  $\text{Net Income}=\left(\begin{array}{l}\text{Equity at the end}-\text{Equity in the beginning}\\ -\text{Issue of stock}+\text{Dividend}\end{array}\right)$

Substitute $12,500 for equity in the beginning, $1,400 for issue of stock,$13,500 for equity at the end, $2,000 for dividend.

  $\begin{array}{c}\text{Net Income}=\$13,500-\$12,500-\$1,400+\$2,000\\ =\$15,500-\$13,900\\ =\$1,600\end{array}$

Hence, the net income of B Company as on December 31, 2017 is $1,600.

g.

To determine

To compute: The amount of assets, of C Company as on December 31, 2017.

Explanation of Solution

Given,

The amount of liabilities is $29,000 as on December 31, 2017.

The amount of equity is $26,875 as on December 31, 2017.

Formula to calculate asset is,

  $\text{Assets}=\text{Liablities}+\text{Equity}$

Substitute$29,000 for liabilities and $26,875 for equity.

  $\begin{array}{c}\text{Assets}=\$29,000+\$26,875\\ =\$55,875\end{array}$

Working notes:

Calculation of the amount of equity as on December 31, 2016,

  $\begin{array}{c}\text{Equity}=\text{Assets}-\text{liablities}\\ =\$24,000-\$9,000\\ =\$15,000\end{array}$

Calculation of the amount of equity as on December 31, 2017,

  $\begin{array}{c}\text{Equity at the end}=\left(\begin{array}{l}\text{Equity in the beginning}+\text{Issue of stock}\\ +\text{Net income}-\text{Dividend}\end{array}\right)\\ =\$15,000+\$9,750+\$8,000-\$5,875\\ =\$32,750-\$5,875\\ =\$26,875\end{array}$

Hence, the amount of asset of C Company as on December 31, 2017 is $55,875.

h.

To determine

To compute: The amount of stock issuance, of D Company as on December 31, 2017.

Explanation of Solution

Given,

The amount of equity is $20,000 of December 31, 2016.

The amount of equity is $61,000 of December 31, 2017.

Net income is $14,000.

Formula to calculate stock issuance is,

  $\text{Stock Issuances}=\text{Equity at the end}-\text{Equity in the beginning}-\text{Net Income}$

Substitute $20,000 for equity in the beginning, $14,000 for net income, $61,000 for equity at the end.

  $\begin{array}{c}\text{Stock Issuances}=\$61,000-\$20,000-\$14,000\\ =\$27,000\end{array}$

Working notes:

Calculation of the amount of equity as on December 31, 2016,

  $\begin{array}{c}\text{Equity}=\text{Assets}-\text{liablities}\\ =\$60,000-\$40,000\\ =\$20,000\end{array}$

Calculation of the amount of equity as on December 31, 2017,

  $\begin{array}{c}\text{Equity}=\text{Assets}-\text{liablities}\\ =\$85,000-\$24,000\\ =\$61,000\end{array}$

Hence, the amount of stock issuances of D company as on December 31, 2017 is $27,000.

i.

To determine

To compute: The amount of liabilities of E Company as on December 31, 2016.

Explanation of Solution

Given,

The amount of assets is $119,000 as on December 31, 2016.

The amount of equity is $27,500 as on December 31, 2016.

Formula to calculate equity is,

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

Substitute $119,000 for assets and $27,500 for equity.

  $\begin{array}{c}\text{Liabilities}=\$119,000-\$27,500\\ =\$91,500\end{array}$

Working notes:

Calculation of the amount of equity as on December 31, 2017,

  $\begin{array}{c}\text{Equity}=\text{Assets}-\text{liablities}\\ =\$113,000-\$70,000\\ =\$43,000\end{array}$

Calculation of the amount of equity as on December 31, 2016,

  $\begin{array}{c}\text{Equity in the beginning}=\left(\begin{array}{l}\text{Equity at the end}+\text{Dividend}\\ -\text{Issuance of Stock}-\text{Net income}\end{array}\right)\\ =\$43,000+\$11,000-\$6,500-\$20,000\\ =\$54,000-\$26,500\\ =\$27,500\end{array}$

Hence, the amount of liabilities of E company as on December 31, 2016 is $91,500.