Chapter 1, Problem 4PA

To determine

Ascertain the missing amounts.

Answer to Problem 4PA

1. a) Salary expense $23,000.
2. b) Net Income: $6,000.
3. c) Net Income: $6,000.
4. d) Accounts Payable: $4,900.
5. e) Common Stock: $11,100.
6. f) Retained Earnings at the end: $10,000.
7. g) Total liabilities and Stockholders ‘equity: $26,000.

Explanation of Solution

(c)

Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.

First, calculate the amount of net income from the statement of stockholders’ equity.

Calculate the amount of net income:

$\begin{array}{c}\text{Net Income = }\left[\left(\begin{array}{l}\text{Retained earnings}\\ \text{ at the end}\end{array}\right)+\text{Dividends paid}-\left(\begin{array}{l}\text{Retained earnings }\\ \text{at the beginning}\end{array}\right)\right]\\ \text{ = \$10,000+\$3,000}-\text{\$7,000}\\ \text{= \$6,000}\end{array}$

(b)

From the above calculation (c), it is noted that the net income is $6,000.

(a)

Expenses: Expenses are costs incurred for the operations of a business. The costs incurred for generating revenues are rent expense, depreciation expense, general and administrative expenses, selling expenses, and salaries expense.

Calculate the amount of salary expense.

$\begin{array}{c}\text{Salary}\text{Expense}\text{=}\left(\begin{array}{l}\text{Total}\text{Revenues}-\text{Advertising}\text{expense}-\\ \text{Utilities}\text{Expense}-\text{Net}\text{income}\end{array}\right)\\ \text{=}\text{\$39,000}-\text{\$6,000}-\text{\$4,000}-\text{\$6,000}\\ \text{=}\text{\$23,000}\end{array}$

Hence, from the above calculation, it is noted that the amount of salary expense is $23,000.

(e)

Common stock: Common stock is the instrument used by the company for raising funds from the general public, through issuing common or ordinary shares to the stockholders. This is an investment for the shareholders for which they receive the dividends from the issuing company, and have voting rights.

Calculate the amount of common stock:

Corporation B
Statement of Stockholders' equity
For the year ended December 31,2021
Particulars	Common Stock	Retained earnings	Total Stockholders' equity
Balance at the beginning	$10,000	$7,000	$17,000
Add:
Issuance of stock	$1,100		$1,100
Net Income		$6,000 (1)	$6,000 (1)
	$11,100
Less:
Dividends Paid		($3,000)	($3,000)
Balance at the end	$11,100	$10,000	$21,100

Table (1)

Hence, from the above calculation, it is noted that the amount of common stock is $11,100.

Working note:

Calculate the amount of net income:

$\begin{array}{c}\text{Net Income = }\left[\left(\begin{array}{l}\text{Retained earnings}\\ \text{ at the end}\end{array}\right)+\text{Dividends paid}-\left(\begin{array}{l}\text{Retained earnings }\\ \text{at the beginning}\end{array}\right)\right]\\ \text{ = \$10,000+\$3,000}-\text{\$7,000}\\ \text{= \$6,000}\end{array}$

(1)

(f)

Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.

Calculate the amount of retained earnings:

Corporation B
Statement of Stockholders' equity
For the year ended December 31,2021
Particulars	Common Stock	Retained earnings	Total Stockholders' equity
Balance at the beginning	$10,000	$7,000	$17,000
Add:
Issuance of stock	$1,100		$1,100
Net Income		$6,000 (1)	$6,000 (1)
	$11,100
Less:
Dividends Paid		($3,000)	($3,000)
Balance at the end	$11,100	$10,000	$21,100

Table (2)

Thus, from the above calculation, it is noted that the amount of retained earnings is $10,000.

(g)

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relation between resources or assets of a business and claims on the resources by the creditors, and the owners.

Calculate the amount of total liabilities and stockholders’ equity.

According to accounting equation, total assets equals to total liabilities and stockholders’ equity. It is given that the value of Total assets is $26,000; therefore, total liabilities and stockholders’ equity would be $26,000.

(d)

Calculate the amount of accounts payable:

$\begin{array}{c}\text{Account}\text{payable}\text{(Liabilities)}\text{=}\text{Assets}-\text{Total}\text{stockholders'}\text{equity}\\ \text{= \$26,000}-\text{\$21,100}\\ \text{=\$4,900}\end{array}$

Therefore, from the above calculation it is identified that the amount of accounts payable is $4,900.

Note: Accounts payable is treated as total liabilities.