Chapter 1, Problem 2PSA

1.

a.

To determine

To compute:

The amount of equity, of A Company as on December 31, 2014.

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, 2014 is $30,500.

b.

To determine

To compute:

The amount of equity, of A Company as on December 31, 2015.

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, 2015 is $41,500.

c.

To determine

To compute:

The amount of liabilities, of A Company as on December 31, 2015.

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, 2015 is $16,500.

2.

a.

To determine

To compute:

The amount of equity, of B Company as on December 31, 2014.

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, 2014 is $12,500.

b.

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, 2015 is $13,500.

c.

To determine

To compute:

The net income, of A Company as on December 31, 2015.

Explanation of Solution

Given,

The amount of equity is $12,500 of December 31, 2014.

The amount of equity is $13,500 of December 31, 2015.

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, 2015 is $1,600.

3.

To determine

To compute:

The amount of assets, of C Company as on December 31, 2015.

Explanation of Solution

Given,

The amount of liabilities is $29,000 as on December 31, 2015.

The amount of equity is $26,875 as on December 31, 2015.

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, 2014,

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

Calculation of the amount of equity as on December 31, 2015,

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

Hence, the amount of asset of C Company as on December 31, 2015 is $55,875.

4.

To determine

To compute:

The amount of stock issuance, of D Company as on December 31, 2015.

Explanation of Solution

Given,

The amount of equity is $20,000 of December 31, 2014.

The amount of equity is $61,000 of December 31, 2015.

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, 2014,

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

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, 2015 is $27,000.

5.

To determine

To compute:

The amount of liabilities of E Company as on December 31, 2014.

Explanation of Solution

Given,

The amount of assets is $119,000 as on December 31, 2014.

The amount of equity is $27,500 as on December 31, 2014.

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, 2015,

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

Calculation of the amount of equity as on December 31, 2015,

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

Hence, the amount of liabilities of E company as on December 31, 2014 is $91,500.