Question

7. Tucker Company’s balance sheet reflected assets of $12,000, liabilities of $4,000 and common stock of...

7.

Tucker Company’s balance sheet reflected assets of $12,000, liabilities of $4,000 and common

stock of $3,000 as of December 31, 2014. If retained earnings on December 31, 2015 balance

sheet is $8,000 and Tucker paid a $2,000 dividend during 2015, then the amount of net income

for 2015 was which of the following?

a.$1,000

b. $3,000

c.$5,000

d. None of the above

Business   Accounting   
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Answer #1

SOLUTION

Amount of net income = $5,000

If assets on December 31, 2014 totaled $12,000, then total claims (including liabilities, common stock, and retained earnings) on that date must have also been $12,000.

If liabilities were $4,000 and common stock was $3,000, retained earnings on December 31, 2014 must have been $5,000 (12,000 - 4,000 - 3,000)

At the end of 2015, the company reported $8,000 in retained earnings, a $3,000 increase. During 2015, tucker paid a $2,000 cash dividend, which reduced retained earnings. Therefore, 2015 net income must have been $3,000 greater than the dividend paid. $2,000 + $3,000 = $5,000

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