Question

A company that uses the accrual method of accounting started the fiscal year with assets of...

A company that uses the accrual method of accounting started the fiscal year with assets of $600,000 and liabilities of $400,000. During the fiscal year the company recorded credit sales of $250,000, of which $8,000 remained to be collected at year end, and incurred expenses of $90,000, of which $72,000 was paid in cash. A stock dividend valued at $10,000 was declared and issued to stockholders during the year. What is the year-end balance of total equity?

$350,000

$360,000

$370,000

$380,000

You Answered Correctly! (Answer is B, $360,000)

Correct! The company's beginning equity is $200,000 ($600,000 of assets – $400,000 of liabilities). The current year accrual basis earnings are $160,000 ($250,000 revenue – $90,000 expenses). The ending equity is $360,000 which is the beginning balance of $200,000 plus the current year earnings of $160,000.

For this question why isn't the $8,000 remaining to be collected at year end deducted from the $250,000 credit sales and the $72,000 paid in cash deducted from the $90,000 expenses incurred when computing the year end balance of total equity? Please help because I'm not understanding why nothing is done to the $8,000 and $72,000 for this problem.

Business   Accounting   
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Homework Answers

Answer #1

Equity being residual interest in the assets if the company after deducting all liability it can be derived either by reducing liability from total assets of the company or by adjusting current year changes in equity to opening equity.

in this question closing equity is arrived by using later method i.e., by adjusting current year changes in equity. i.e., $360,000

$8,000 is accounts receivable (believed to be received in future) and expenses not paid amounting to $ 18,000 ($90,000 - $72,000) is accounts payable.

Calculation of closing equity.

Total Asset - Liability = Equity

opening asset - $600,000

Add: accounts receivable - $8,000

Add: Cash sales - $ 242,000

less: Cash paid - ($72,000)

Total Asset = $778,000

Liabilities

Opening Liabilities $400,000

add: accounts payable - $18,000

Total Liabilities - $418,000

Closing Equity = $778,000 - $418,000 = $360,000

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