Q23E - Horngren'S Financial And Managerial Accounting

Question

During 2018, Flowing Rivers Spa reported revenue of \(30,000. Total expenses for the year were \)15,000. Flowing Rivers Spa ended the year with total assets of \(43,000, and it owed debts totaling \)14,000. At year-end 2017, the business reported total assets of \(28,000 and total liabilities of \)14,000. Requirements 1. Compute Flowing Rivers Spa’s net income for 2018. 2. Did Flowing Rivers Spa’s stockholders’ equity increase or decrease during 2018? By how much?

Step-by-Step Solution

Answer

(1) Net income equals $15,000.

(2) Increase in stockholders’ equity by $15,000.

Step-by-Step-Solution Step 1: Calculation of net income

Net income is calculated as follows: 

$\begin{array}{c}\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{NetIncome}\mathbf{ }\mathbf{=}\mathbf{Revenues}-\mathbf{Expenses}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{30}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{000}\\ =\$15,000\end{array}$

Step 2: Calculation of Total Stockholders’ Equity for 2018

Total Stockholders’ equity for 2018 End is calculated as follows:

$\begin{array}{c}\mathbf{TotalStockholders}\mathbf{\text{'}}\mathbf{Equity}\text{ }\mathbf{2018}\mathbf{=}\mathbf{Assets}-\mathbf{Liabilities}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{43}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{000}\\ =\$29,000\end{array}$

Step 3: Calculation of Total Stockholders’ Equity for 2017

Total Stockholders’ equity for 2018 End is calculated as follows:

$\begin{array}{c}\mathbf{TotalStockholders}\mathbf{\text{'}}\mathbf{Equity}\text{ }\mathbf{2017}\mathbf{=}\mathbf{Assets}-\mathbf{Liabilities}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{000}\\ =\$14,000\end{array}$

Step 4: Calculation of increase in stockholders’ equity

 Incease in stockholders’ equity is calculated as follows: 
$\begin{array}{c}\mathbf{InreaseinStockholders}\mathbf{\text{'}}\mathbf{Equity}\mathbf{ }\mathbf{=}\mathbf{TotalStockholders}\mathbf{\text{'}}\mathbf{Equity}\text{}\mathbf{2018}-\mathbf{TotalStockholders}\mathbf{\text{'}}\mathbf{Equity}\text{}\mathbf{2017}\\ \mathbf{=}\mathbf{\$}\mathbf{29}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{14}\mathbf{,}\mathbf{000}\\ =\$15,000\\ \\ \mathrm{Thus}, \mathrm{net} \mathrm{income} \mathrm{is} \$15,00 \mathrm{and} \mathrm{stockholders}’ \mathrm{equity} \mathrm{increase} \mathrm{by} \$15,000. \end{array}$