Chapter 8, Problem 8.5E

To determine

Conceptual Introduction:

Stockholders' equity

Stockholders equity is the residual amount of assets available to shareholders after disbursement of all the liabilities. It is calculated by subtracting Total liabilities from the Total assets of the company which can be depicted as follows:

  $Stockholdersequity=TotalAssets-TotalLiabilities$

Net income or loss of Hughey Inc.

Answer to Problem 8.5E

Net income for the year of Hughey Inc. is $1, 27,000

Explanation of Solution

Firstly, the beginning paid-in capital is calculated using the following formula:

  $Beginningpaid-incapital=Endingpaidincapital-Increaseinpaid-incapital$

In the given problem, it is given that ending paid-in capital is $90,000 and there has been increase of $20,000 in the year.

  $Therefore,Beginningpaid-incapital=\$90,000-\$20,000=\$70,000$

Thereafter Beginning retained earnings would be calculated using the following formula:

  $BeginningRetainedearnings=Beginningownersequity-BeginningPaid-incapital$

Beginning owner's equity is given as $2, 60,000 and beginning paid-in capital has been calculated as $70,000.

  $Thus,BeginningRetainedearnings=\$2,60,000-\$70,000=\$1,90,000$

Now, liabilities at the beginning of the year need to be calculated with the help of following formula:

  $BeginningLiabilities=Endingliabilities-Increaseinliabilities$

Liabilities at the end of the year are given as $1, 16,000 and an increase of $11,000 has been taken place in the year.

  $Therefore,BeginningLiabilities=\$1,16,000-\$11,000=\$1,05,000$

Thereafter, assets as on the beginning of the year will be calculated using the following:

  $BeginningAssets=BeginningLiabilities+Beginningownersequity$

Beginning liabilities have been worked out as $1, 05,000 and beginning owners equity is given as $2, 60,000.

  $Thus,BeginningAssets=\$1,05,000+\$2,60,000=\$3,65,000$

Now, assets at the end of the year would be calculated using the following formula:

  $EndingAssets=Beginningassets+Increaseinassets$

Beginning assets have been calculated as $3, 65,000 and there has been an increase of $1, 30,000 in the assets.

  $Therefore,EndingAssets=\$3,65,000+\$1,30,000=\$4,95,000$

Ending retained earnings needs to be calculated with the help of following formula:

  $EndingRetainedearnings=Endingassets-Endingliabilities-Endingpaid-incapital$

Ending assets have been calculated as $4, 95,000, ending liabilities are given as $1, 16,000 and ending paid-in capital is $90,000.

  $Thus,EndingRetainedearnings=\$4,95,000-\$1,16,000-\$90,000=\$2,89,000$

Finally, retained earnings at the end of the year would be calculated as follows:

  $EndingRetainedearnings=Beginningretainedearnings+Dividends–BeginningRetainedearnings$

Beginning retained earnings has been calculated as $2, 89,000, dividend is $28,000 and beginning retained earnings is $1, 90,000.

  $Therefore,EndingRetainedearnings=\$2,89,000+\$28,000-\$1,90,000=\$1,27,000$

All the above calculations can be seen from the table below:

Particulars	A	=	L	+	OE
					PIC	+	RE
Beginning	3,65,000	=	1,05,000	+	70,000	+	2,60,000
Add: Changes	1,30,000	=	11,000	+	20,000	+	2,89,000 (28,000)
Ending	4,95,000	=	1,16,000	+	90,000	+	2,89,000

Thus, the net income amount comes out to $1, 27,000.