Q21E - Horngren'S Financial And Managerial Accounting

Question

Wizco Advertising’s balance sheet data at May 31, 2018, and June 30, 2018, follow:

May 31, 2018 June 30, 2018

Total Assets \( 122,000 \) 287,000

Total Liabilities 66,000 144,000

For each of the following situations that occurred in June, 2018 with regard to

common stock and dividends of a corporation, compute the amount of net income or

net loss during June 2018.

a. The company issued \(10,000 of common stock and paid no dividends.

b. The company issued no common stock. It paid cash dividends of \)3,000.

c. The company issued \(12,500 of common stock and paid cash dividends of

\)30,000.

Step-by-Step Solution

Answer

(a) Net income equals $77,000.

(b) Net income equals $90,000.

(c) Net income equals $104,500

Step-by-Step-Solution Step 1: Calculation of Total Equity

Total equity as on May 31,2018 and June 30, 2018 equals:

$\begin{array}{c}\mathbf{Equity}\text{ }\mathbf{May}\mathbf{31}\mathbf{,}\mathbf{2018}\mathbf{=}\mathbf{Assets}-\mathbf{Liabilities}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{122}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{66}\mathbf{,}\mathbf{000}\\ =\$56,000\end{array}$

$\begin{array}{c}\mathbf{Equity}\text{}\mathbf{June}\mathbf{30}\mathbf{,}\mathbf{2018}\mathbf{=}\mathbf{Assets}-\mathbf{Liabilities}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{287}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{144}\mathbf{,}\mathbf{000}\\ =\$143,000\end{array}$

Step 2: Calculation of Net Income (Loss)

(a) Net income (loss) is calculated as follows: 

$\begin{array}{c}\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{NetIncome}\left(\mathbf{Loss}\right) \mathbf{=}(\mathbf{Equity}\text{}\mathbf{June}\mathbf{30}\mathbf{,}\mathbf{2018}-\mathbf{Equity}\text{}\mathbf{May}\mathbf{31}\mathbf{,}\mathbf{2018})-\mathbf{CommonStockIssued}\\ \mathbf{=}(\mathbf{\$}\mathbf{143}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{56}\mathbf{,}\mathbf{000})-\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{000}\\ =\$77,000\end{array}$

Step 3: Calculation of Net Income (Loss)

(b) Net income (loss) is calculated as follows: 

$\begin{array}{c}\mathbf{NetIncome}\left(\mathbf{Loss}\right)\mathbf{=}(\mathbf{Equity}\text{}\mathbf{June}\mathbf{30}\mathbf{,}\mathbf{2018}-\mathbf{Equity}\text{}\mathbf{May}\mathbf{31}\mathbf{,}\mathbf{2018})+\mathbf{Dividends}\\ \mathbf{=}(\mathbf{\$}\mathbf{143}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{56}\mathbf{,}\mathbf{000})+\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\\ =\$90,000\end{array}$

Step 4: Calculation of Net Income (Loss)

(c) Net income (loss) is calculated as follows: 

$\begin{array}{c}\mathbf{NetIncome}\left(\mathbf{Loss}\right)\mathbf{=}(\mathbf{Equity}\text{}\mathbf{June}\mathbf{30}\mathbf{,}\mathbf{2018}-\mathbf{Equity}\text{}\mathbf{May}\mathbf{31}\mathbf{,}\mathbf{2018})-\mathbf{CommonStockIssued}+\mathbf{Dividends}\\ \mathbf{=}(\mathbf{\$}\mathbf{143}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{56}\mathbf{,}\mathbf{000})-\mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{500}\mathbf{+}\mathbf{\$}\mathbf{30}\mathbf{,}\mathbf{000}\\ =\$104,500\end{array}$