Chapter 2, Problem 2.5E

To determine

(a)

Accounting Equation:

It is a vital element in recording the effects of financial activities in a business. The balance sheet also known as statement of financial condition is expressed in the accounting equation as:

  $Assets=Liabilities\text{ + Stockholder's equity}$

The balance sheet is prepared using accounting equation in vertical form. Also, the balance on assets side must be equal to sum of balances of liabilities and stockholder's equity.

Stockholder's equity of company A as of December 31, 20Y7

Answer to Problem 2.5E

The stockholders' equity of Company A as of December 31, 20Y7 is $825000.

Explanation of Solution

Computation of stockholders' equity as of December 31, 20Y7:

In accounting equation,

  $\begin{array}{l}\text{ Assets = Liabilities + Stockholders' equity}\\ \text{Stockholders' equity = Assets - Liabilities}\\ \text{ = \$1200000 - \$375000}\\ \text{ = \$825000}\end{array}$

To determine

(b)

Accounting Equation:

It is a vital element in recording the effects of financial activities in a business. The balance sheet also known as statement of financial condition is expressed in the accounting equation as:

  $Assets=Liabilities\text{ + Stockholder's equity}$

The balance sheet is prepared using accounting equation in vertical form. Also, the balance on assets side must be equal to sum of balances of liabilities and stockholder's equity.

Stockholders' equity of company A as of December 31, 20Y8, when assets increased by $150000 and liabilities increased by $80000 during 20Y8.

Answer to Problem 2.5E

The stockholders' equity of Company A as of December 31, 20Y8 is $895000.

Explanation of Solution

Computation of Assets as of December 31, 20Y8:

  $\begin{array}{l}\text{Balance of assets as of = Balance of assets as of + Increase in assets during}\\ \text{December 31, 20Y8 December 31, 20Y7 year 20Y8}\\ \text{ = \$1200000 + \$150000}\\ \text{ = \$1350000}\end{array}$

Computation of liabilities of Company A as of December 31, 20Y8:

  $\begin{array}{l}\text{Balance of liabilities as of = Balance of liabilities as of + Increase in liabilities }\\ \text{December 31, 20Y8 December 31, 20Y7 during year 20Y8}\\ \text{ = \$375000 + \$80000}\\ \text{ = \$455000}\end{array}$

Computation of stockholders' equity of company a as of December 31, 20Y8:

In accounting equation,

  $\begin{array}{l}\text{ Assets = Liabilities + Stockholders' equity}\\ \text{Stockholders' equity = Assets - Liabilities}\\ \text{ = \$1350000 - \$455000}\\ \text{ = \$895000}\text{.}\end{array}$

To determine

(c)

Accounting Equation:

It is a vital element in recording the effects of financial activities in a business. The balance sheet also known as statement of financial condition is expressed in the accounting equation as:

  $Assets=Liabilities\text{ + Stockholder's equity}$

The balance sheet is prepared using accounting equation in vertical form. Also, the balance on assets side must be equal to sum of balances of liabilities and stockholder's equity.

Stockholders' equity of company A as of December 31, 20Y8, when assets decreased by $200000 and liabilities increased by $100000 during 20Y8.

Answer to Problem 2.5E

The stockholders' equity of Company A as of December 31, 20Y8 is $525000.

Explanation of Solution

Computation of Assets as of December 31, 20Y8:

  $\begin{array}{l}\text{Balance of assets as of = Balance of assets as of - Decrease in assets during}\\ \text{December 31, 20Y8 December 31, 20Y7 year 20Y8}\\ \text{ = \$1200000 - \$200000}\\ \text{ = \$1000000}\end{array}$

Computation of liabilities of Company A as of December 31, 20Y8:

  $\begin{array}{l}\text{Balance of liabilities as of = Balance of liabilities as of + Increase in liabilities }\\ \text{December 31, 20Y8 December 31, 20Y7 during year 20Y8}\\ \text{ = \$375000 + \$100000}\\ \text{ = \$475000}\end{array}$

Computation of stockholders' equity of company a as of December 31, 20Y8:

In accounting equation,

  $\begin{array}{l}\text{ Assets = Liabilities + Stockholders' equity}\\ \text{Stockholders' equity = Assets - Liabilities}\\ \text{ = \$1000000 - \$475000}\\ \text{ = \$525000}\text{.}\end{array}$

To determine

(d)

Accounting Equation:

It is a vital element in recording the effects of financial activities in a business. The balance sheet also known as statement of financial condition is expressed in the accounting equation as:

  $Assets=Liabilities\text{ + Stockholder's equity}$

The balance sheet is prepared using accounting equation in vertical form. Also, the balance on assets side must be equal to sum of balances of liabilities and stockholder's equity.

Stockholders' equity of company A as of December 31, 20Y8, when assets increased by $400000 and liabilities decreased by $75000 during 20Y8.

Answer to Problem 2.5E

The stockholders' equity of Company A as of December 31, 20Y8 is $1300000.

Explanation of Solution

Computation of Assets as of December 31, 20Y8:

  $\begin{array}{l}\text{Balance of assets as of = Balance of assets as of + Increase in assets during}\\ \text{December 31, 20Y8 December 31, 20Y7 year 20Y8}\\ \text{ = \$1200000 + \$400000}\\ \text{ = \$1600000}\end{array}$

Computation of liabilities of Company A as of December 31, 20Y8:

  $\begin{array}{l}\text{Balance of liabilities as of = Balance of liabilities as of + Decrease in liabilities }\\ \text{December 31, 20Y8 December 31, 20Y7 during year 20Y8}\\ \text{ = \$375000 + \$75000}\\ \text{ = \$300000}\end{array}$

Computation of stockholders' equity of company a as of December 31, 20Y8:

In accounting equation,

  $\begin{array}{l}\text{ Assets = Liabilities + Stockholders' equity}\\ \text{Stockholders' equity = Assets - Liabilities}\\ \text{ = \$1600000 - \$300000}\\ \text{ = \$1300000}\text{.}\end{array}$

To determine

(e)

Accounting Equation:

It is a vital element in recording the effects of financial activities in a business. The balance sheet also known as statement of financial condition is expressed in the accounting equation as:

  $Assets=Liabilities\text{ + Stockholder's equity}$

The balance sheet is prepared using accounting equation in vertical form. Also, the balance on assets side must be equal to sum of balances of liabilities and stockholder's equity.

Net income (or net loss) during 20Y8, when assets and liabilities were $1275000 and $290000, respectively (there were no dividends and no additional common stock issued).

Answer to Problem 2.5E

The net income of company A as of December 31, 20Y8 is $160000/

Explanation of Solution

Computation of stockholders' equity as of December 31, 20Y7:

In accounting equation,

  $\begin{array}{l}\text{ Assets = Liabilities + Stockholders' equity}\\ \text{Stockholders' equity = Assets - Liabilities}\\ \text{ = \$1200000 - \$375000}\\ \text{ = \$825000}\end{array}$

Assuming retained earnings is nil as of December 31, 20Y7,

  $\begin{array}{l}\text{Stockholders' equity = Common Stock + Retained Earnings}\\ \text{Common stock = Stockholders' equity - Retained Earnings}\\ \text{ = \$825000 - nil}\\ \text{ = \$825000}\end{array}$

Computation of Stockholders' equity as of December 31, 20Y8:

In accounting equation,

  $\begin{array}{l}\text{ Assets = Liabilities + Stockholders' equity}\\ \text{Stockholders' equity = Assets - Liabilities}\\ \text{ = \$1275000 - \$290000}\\ \text{ = \$985000}\text{.}\end{array}$

Assuming no additional common stock during year 20Y8,

Common stock during Year 20Y8 = $825000

  $\begin{array}{l}\text{Stockholders' equity = Common Stock + Retained Earnings}\\ \text{Retained Earnings = Stockholders' equity - Common stock}\\ \text{ = \$985000 - \$825000}\\ \text{ = \$160000}\end{array}$

Computation of Net income as of year ending December 31, 20Y8:

  $\begin{array}{l}\text{Net income = Retained earnings + Dividends paid}\\ \text{Here, since there were no dividends during year 20Y8}\\ \text{Therefore,}\\ \text{Net Income = \$160000 + 0}\\ \text{ = \$160000}\end{array}$