Chapter 1, Problem 4PB

To determine

Compute the missing amounts.

Answer to Problem 4PB

1. a) Revenues: $30,000.
2. b) Net Income: $5,000.
3. c) Issuance of stock: $3,000.
4. d) Dividends: $4,000.
5. e) Supplies: $5,900
6. f) Total assets: $29,000.
7. g) Common Stock: $17,000.
8. h) Retained earnings: $8,000.
9. i) Total liabilities and Stockholders ‘equity: $25,000.

Explanation of Solution

(b)

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.

Net income in the statement of statement of stockholders’ equity is stated as $5,000. Hence, the amount of net income is $5,000.

(a)

Revenues: Revenues are earnings from operations of a business. The operating activities are sale of goods and services, and rent revenue.

Compute the amount of revenues:

$\begin{array}{c}\text{Total}\text{revenues}\text{=}\text{Total}\text{expenses+}\text{Net}\text{income}\\ \text{ = \$25,000}\text{(1)+\$5,000 }\\ \text{= \$30,000}\end{array}$

Hence, the amount of revenues earned during the year is $30,000.

Note: For the value of net income refer to calculation (b)

Working note:

Compute the amount of total expenses:

$\begin{array}{c}\text{Total expenses = Salary}+\text{Rent expense}+\text{Advertising expense}\\ =\$13,000+\$7,000+5,000\\ =\$25,000\end{array}$

(1)

(c)

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.

Compute the amount of common stock issued.

$\begin{array}{c}\begin{array}{l}\text{Issuane}\text{of}\text{stock}\\ \text{during}\text{the}\text{year}\end{array})\text{=}\text{Ending}\text{balance}\text{of}\text{stock}-\text{Beginning}\text{balance}\text{of}\text{stock}\\ \text{ = \$17,000}-\text{\$14,000}\\ \text{ = \$3,000}\end{array}$

Hence, the amount of common stock issued during the year is $3,000

(d)

Dividends: This is the amount of cash distributed to stockholders by a company out its earnings, according to their proportion of shares invested in the company.

Compute the amount of dividends.

$\begin{array}{c}\text{Dividends}\text{paid}\text{=}\left[\begin{array}{l}\left(\text{Beginning}\text{balance}\text{of}\text{retained}\text{earnings}\text{+Net}\text{income}\right)\\ -\text{Ending}\text{balance}\text{of}\text{retained}\text{earnings}\end{array}\right]\\ \text{= \$7,000}\text{+}\text{\$5,000}-\text{\$8,000}\\ \text{ = \$4,000}\end{array}$

Hence, the amount of dividends paid during the year is $4,000.

(g)

Compute the amount of common stock:

Incorporation C
Statement of Stockholders Equity
For the year ended December 31,2021
Particulars	Common Stock	Retained earnings	Total Stockholders’ Equity
Balance at the Beginning	$14,000	$7,000	$21,000
Add:
Additions during the year	$3,000		$3,000
Net Income during the year		$5,000	$5,000
		$12,000	$29,000
Less:
Dividends Paid (2)		($4,000)	($4,000)
Balance at the End	$17,000	$8,000	$25,000

Table (1)

Hence, from the above calculation, it is noted that the common stock issued is $17,000

Note: For the value of net income refer to calculation (b)

Working note:

Compute the amount of dividends:

$\begin{array}{c}\text{Dividends}\text{paid}\text{=}\left[\begin{array}{l}\left(\text{Beginning}\text{balance}\text{of}\text{retained}\text{earnings}\text{+Net}\text{income}\right)\\ -\text{Ending}\text{balance}\text{of}\text{retained}\text{earnings}\end{array}\right]\\ \text{= \$7,000}\text{+}\text{\$5,000}-\text{\$8,000}\\ \text{ = \$4,000}\end{array}$

(2)

(h)

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.

Compute the amount of retained earnings:

Incorporation C
Statement of Stockholders Equity
For the year ended December 31,2021
Particulars	Common Stock	Retained earnings	Total Stockholders’ Equity
Balance at the Beginning	$14,000	$7,000	$21,000
Add:
Additions during the year	$3,000		$3,000
Net Income during the year		$5,000	$5,000
		$12,000	$29,000
Less:
Dividends Paid (2)		($4,000)	($4,000)
Balance at the End	$17,000	$8,000	$25,000

Table (2)

Hence, from the above calculation, it is noted that the value of retained earnings is $8,000

Note: For the value of net income refer to calculation (b)

(i)

Compute the amount of total stockholders’ equity:

Incorporation C
Statement of Stockholders Equity
For the year ended December 31,2021
Particulars	Common Stock	Retained earnings	Total Stockholders’ Equity
Balance at the Beginning	$14,000	$7,000	$21,000
Add:
Additions during the year	$3,000		$3,000
Net Income during the year		$5,000	$5,000
		$12,000	$29,000
Less:
Dividends Paid (2)		($4,000)	($4,000)
Balance at the End	$17,000	$8,000	$25,000

Table (3)

Hence, from the above calculation, it is noted that the total stockholders’ equity is $25,000

Note: For the value of net income refer to calculation (b)

(f)

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.

Compute the amount of total assets:

$\begin{array}{c}\text{Total}\text{Assets}\text{=}\left[\begin{array}{l}\text{Total liabilities ( Accounts}\text{payable)+}\\ \text{Total stockholders' equity}\end{array}\right]\\ \text{=\$4,000+\$25,000}\\ \text{=\$29,000}\end{array}$

According to accounting equation, total assets equals to total liabilities and stockholders’ equity. Therefore, total assets is $29,000 since, Total liabilities and stockholders’ equity is $29,000

(e)

Compute the amount of supplies:

$\begin{array}{c}\text{Supplies}\text{=}\text{Total}\text{Assets}-\text{Cash}-\text{land}-\text{Building}\\ \text{=}\text{\$29,000}-\text{\$23,100}\\ \text{ =\$5,900}\end{array}$

Hence, the amount of supplies is $5,900.

Note: For the value of total assets refer to calculation (f).