Q22E - Horngren'S Financial And Managerial Accounting

Question

Mountain Drycleaners started 2018 with total assets of \(19,000 and total liabilities of \)14,000. At the end of 2018, Mountain’s total assets stood at \(12,000 and total liabilities were \)9,000. Requirements 1. Did the stockholders’ equity of Mountain Drycleaners increase or decrease during 2018? By how much? 2. Identify the four possible reasons that stockholders’ equity can change

Step-by-Step Solution

Answer

(1) Stockholders’ Equity decreases by $2,000.

(2) Dividends, revenues, expenses and common stock.

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

Total stockholders’ equity of 2018 beginning and end is calculated as follows: 

$\begin{array}{c}\mathbf{Stockholders}\mathbf{\text{'}}\mathbf{Equity}\text{ }\mathbf{at}\mathbf{2018}\mathbf{Beginning}\mathbf{=}\mathbf{Assets}-\mathbf{Liabilities}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{19}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{000}\\ =\$5,000\end{array}$

$\begin{array}{c}\mathbf{Stockholders}\mathbf{\text{'}}\mathbf{Equity}\text{ }\mathbf{at}\mathbf{2018}\mathbf{End}\mathbf{=}\mathbf{Assets}-\mathbf{Liabilities}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{000}\\ =\$3,000\end{array}$

Step 2: Calculation of decrease in stockholders’ equity

Decrease in stockholders’ equity is calculated as follows: 

$\begin{array}{c}\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{DecreaseinStockholders}\mathbf{\text{'}}\mathbf{Equity}\mathbf{ }\mathbf{=}\mathbf{Stockholders}\mathbf{\text{'}}\mathbf{Equity}\text{ }\mathbf{at}\mathbf{2018}\mathbf{Beginning}-\mathbf{Stockholders}\mathbf{\text{'}}\mathbf{Equity}\text{ }\mathbf{at}\mathbf{2018}\mathbf{End}\\ \mathbf{=}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\\ =\$2,000\end{array}$

Step 3: Reason for change in stockholders’ equity

Reasons for the change are as follows: 

• Dividends are paid out of retained earnings, hence it decreases retained earnings as it is a part of equity. 
• Expenses are costs incurred to avail services, which reduces equity. 
• Revenues are the income generated by way of selling of goods or services, and it affects the equity. 
• Issuance of common stock increase the contributed capital, which is a part of stockholders’ equity