Question

The total assets and liabilities of Robot Company at January 1 and December 31, 2018, are presented below.

                                                                        January 1                    December 31

Assets                                                  $76,000                        $112,000

Liabilities                                             26,000                            28,800

Determine the amount of net income or loss for 2018, applying each of the following assumptions concerning the additional issuance of stock and dividends paid by the firm. Each case is independent of the others. I will go over scenario 1 below. Your discussion assignment for the week is to answer scenarios 2 and 3. You will need to post before you can see any of your classmates' posts.

1. Dividends of $10,800 were paid, and no additional stock was issued during the year.

2. Additional stock was issued for $4,800, and no dividends were paid during the year.

3. Additional stock was issued for $62,000, and dividends of $15,600 were paid during the year.

Scenario 1: If assets at the beginning of the year were $76,000 and liabilities at the beginning of the year were $26,000, then stockholders' equity at the beginning of the year must have been $50,000, since - remember - assets minus liabilities equals stockholders' equity. Likewise, assets at the end of the year were $112,000 and liabilities were $28,800, so stockholders' equity must have been $83,200.

Stockholders' equity, therefore, increased by $33,200 during the year. What makes stockholders' equity go up? Net income (which, by the way, is what we are looking for, in case you forgot). What makes stockholders' equity go down? The owners taking equity out of the business, which in a corporation is done through dividends. So:

Beginning equity                      $50,000

Plus net income                            ?

Minus dividends                       (10,800)

Equals ending equity                $83,200

$50,000 plus what minus $10,800 equals $83,200? This is as difficult as the math gets in this course, by the way. The answer is $44,000, right? So that must be our net income.

Now try the other two scenarios and post your answers.

Answer 1

Solution 2:

Beginning Equity = $76000 - $26000 = $50,000

Ending Equity = $112,000 - $28,800 = $83,200

Additional Stock Issued = $4,800

Beginning Equity + Additional Stock Issue + Net Income - Dividends = Ending Equity

$50,000 + $4800 + Net Income - 0 = $83200

Net Income = $83200 - $50000 -$4800

Net Income = $28,400

Solution 3:

Beginning Equity = $76000 - $26000 = $50,000

Ending Equity = $112,000 - $28,800 = $83,200

Additional Stock Issued = $62,000

Dividends paid = $15,600

Beginning Equity + Additional Stock Issue + Net Income - Dividends = Ending Equity

$50,000 + $62000 + Net Income - 15600 = $83200

Net Income = $83200 - $50000 -$62000 + $15600

Net Income (Loss) = - $13200 (Loss)