Question

The total assets and the total liabilities of a business at the beginning and at the end of the year appear below. During the year, $50,000 of dividends were paid and $35,000 cash received in exchange for common stock. Assets Liabilities Beginning of year $295,000 $190,000 End of year 355,000 220,000 The amount of net income for the year was Group of answer choices $45,000 $40,000 $85,000 $135,000

Answer 1

Answer:

Net Income = $45000

Explanation:

The basic accounting equation states that the value of assets is always equal to the sum of the values of liabilities and equity.

Total Assets = Total Liabilities + Total equity

At the beginning of the year:

295000 = 190000 + Total equity

Total Equity = 295000 - 190000

Total Equity = $105000

The net income earned during the year is appropriated in two ways. It is either retained in the business and transferred to retained earning or paid out as dividends or both. Transfer to retained earnings from net income increases equity.

At the end of the year:

355000 = 220000 + Total Equity

Total Equity = 355000 - 220000

Total Equity = $135000

Ending balance of equity = Opening balance of Equity + issuance of equity(Common stock) + Net Income - Dividends

135000 = 105000 + 35000 + Net Income - 50000

135000 = 90000 + Net Income

Net Income = 135000 - 90000

Net Income = $45000