1DC_3 - Horngren'S Financial And Managerial Accounting

Question

Let’s examine a case using Greg’s Tunes and Sal’s Silly Songs. It is now the end of the first year of operations, and the stockholders want to know how well each business came out at the end of the year. Neither business kept complete accounting records, and no dividends were paid. The businesses throw together the data shown on the next page at year-end: \( 23,000 8,000 35,000 22,000 \) 10,000 6,000 44,000 9,000 Total Assets Common Stock Total Revenues Total Expenses Greg’s Tunes: Sal’s Silly Songs: Total Liabilities Common Stock Total Expenses Net Income To gain information for evaluating the businesses, the stockholders ask you several questions. For each answer, you must show your work to convince the stockholders that you know what you are talking about. Requirements 3. Which business has more stockholders’ equity at the end of the year?

Step-by-Step Solution

Answer

Sal’s Silly Songs has higher stockholders’ equity.

Calculation of Total Stockholders’ Equity for Sal’s Silly Songs

 Total stockholders’ Equity is calculated as follows: 

$\begin{array}{rcl}\mathrm{Total} \mathrm{stockholder}\text{'}\mathrm{s} \mathrm{equity}& =& \mathrm{Common} \mathrm{stock}+\left(\mathrm{Revenues}-\mathrm{Expenses}\right)\\ & =& \$8,000+\left(\$35,000-\$22,000\right)\\ & =& \$21,000\end{array}$

Calculation of Total Stockholders’ Equity for Greg’s Tunes

Total stockholders’ Equity is calculated as follows: 

$\begin{array}{rcl}\mathrm{Total} \mathrm{stockholder}\text{'}\mathrm{s} \mathrm{equity}& =& \mathrm{Common} \mathrm{stock}+\mathrm{Net} \mathrm{income}\\ & =& \$6,000+\$9,000\\ & =& \$15,000\end{array}$

Thus, the correct option is Sal’s Silly Songs.