Chapter 1, Problem 4AP

a.

To determine

Prepare a balance sheet as of December 31 of each year.

Explanation of Solution

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Prepare a balance sheet as of December 31 of the Year 2012.

Incorporation LJ
Balance sheet as on December 31, 2012
	Amount ($)		Amount ($)	Amount ($)
Assets		Liabilities
Cash	20,000	Accounts Payable	9,000
Accounts receivable	33,000	Mortgage Payable	100,000
Land	40,000	Total liabilities		109,000
Building, net	260,000	Stockholders' equity
Equipment, net	45,000	Common stock	220,000
Supplies	18,000	Retained earnings	87,000
		Total stockholders’ equity		307,000
Total assets	$416,000	Total liabilities and stockholders’ equity		$416,000

Table (1)

Prepare a balance sheet as of December 31 of the Year 2013.

Incorporation LJ
Balance sheet as on December 31, 2013
	Amount ($)		Amount ($)	Amount ($)
Assets		Liabilities
Cash	23,000	Accounts Payable	6,000
Accounts receivable	42,000	Mortgage Payable	90,000
Land	40,000	Total liabilities		96,000
Building, net	250,000	Stockholders' equity
Equipment, net	43,000	Common stock	220,000
Supplies	20,000	Retained earnings	102,000
		Total stockholders’ equity		322,000
Total assets	$418,000	Total liabilities and stockholders’ equity		$418,000

Table (2)

Working notes:

Calculate the retained earnings for the year 2012.

$\begin{array}{c}\text{Assets }=\text{ Liabilities }+\text{ Stockholders’ equity}\\ \left(\begin{array}{c}\text{Cash +Accounts receivable}\\ \text{Land +Building, net +}\\ \text{Equipment, net + Supplies }\end{array}\right)=\left(\begin{array}{l}\text{Accounts payable+}\\ \text{Mortgage Payable}\end{array}\right)+\left(\begin{array}{l}\text{Common stock }\\ +\text{ Retained earnings }\end{array}\right)\end{array}$

$\begin{array}{c}\left(\begin{array}{l}\$20,000+\$33,000\\ +\$40,000+\$260,000\\ +\$45,000+\$18,000\end{array}\right)=\left(\begin{array}{l}\$9,000\\ +\$100,000\end{array}\right)+\left(\begin{array}{l}\$220,000\\ +\text{Retained earnings}\end{array}\right)\\ \$416,000=\$109,000+\$220,000+\text{Retained earnings}\\ \$416,000=\text{\$329,000 +Retained earnings}\end{array}$

$\begin{array}{l}\text{Retained earnings}=\$416,000-\text{\$329,000}\\ \text{Retained earnings}=\$87,000\end{array}$

Calculate the retained earnings for the year 2013.

$\begin{array}{c}\text{Assets }=\text{ Liabilities }+\text{ Stockholders’ equity}\\ \left(\begin{array}{c}\text{Cash +Accounts receivable}\\ \text{Land +Building, net +}\\ \text{Equipment, net + Supplies }\end{array}\right)=\left(\begin{array}{l}\text{Accounts payable+}\\ \text{Mortgage Payable}\end{array}\right)+\left(\begin{array}{l}\text{Common stock }\\ +\text{ Retained earnings }\end{array}\right)\end{array}$

$\begin{array}{c}\left(\begin{array}{l}\$23,000+\$42,000\\ +\$40,000+\$250,000\\ +\$43,000+\$20,000\end{array}\right)=\left(\begin{array}{l}\$6,000\\ +\$90,000\end{array}\right)+\left(\begin{array}{l}\$220,000\\ +\text{Retained earnings}\end{array}\right)\\ \$418,000=\$96,000+\$220,000+\text{Retained earnings}\\ \$418,000=\text{\$316,000 +Retained earnings}\end{array}$

$\begin{array}{l}\text{Retained earnings}=\$418,000-\text{\$316,000}\\ \text{Retained earnings}=\$102,000\end{array}$

b.

To determine

Prepare a statement of stockholders’ equity for 2013.

Explanation of Solution

Statement of stockholder’ equity:

This statement reports the beginning stockholders’ equity and all the changes, which led to ending stockholders’ equity. Additional capital, net income from income statement is added to and drawings are deducted from beginning stockholders’ equity to arrive at the result, ending stockholders’ equity.

Prepare a statement of stockholders’ equity for 2013.

Incorporation LJ
Statement of stockholders' equity
For the year ended December 31, 2013
Particulars	Amount ($)
Retained Earnings, Beginning (Refer Table (1))	87,000
Add: Net income	25,000
	112,000
Less: Dividends	10,000
Retained Earnings, Ending (Refer Table (2))	$102,000

Table (3)

Working note:

Calculate the net income.

$\begin{array}{c}\left(\begin{array}{l}\text{Retained earnings, Beginning }\\ \text{+ Net income –Dividends}\end{array}\right)\text{ = Retained earnings, Ending}\\ \$87,000+\text{Net income – \$10,000}=\$102,000\\ \text{Net income}=\$102,000-\$87,000+\$10,000\\ \text{Net income}=\$25,000\end{array}$