Question

The Baldwin Company currently has the following balances on their balance sheet: Total Assets $255,213 Total Liabilities $151,328 Retained Earnings $47,588 Suppose next year the Baldwin Company generates $44,200 in net profit, pays $12,000 in dividends, total assets increase by $55,000, and total liabilities remain unchanged. What will ending Baldwins balance in Common Stock be next year? Select: 1 $79,097 $509,129 $381,753 $143,497

Answer 1

Answer:

$79,097

Explanation:

The accounting equation shows the relationship between the elements of a balance sheet which are assets liabilities and equity. This may be expressed mathematically as

Assets = Liabilities + Equity

While assets include fixed assets, cash, inventories, account receivables etc, liabilities include accounts payable, loans payable, accrued expenses etc.

Equity which represents the amount owed to the owners of the business includes retained earnings (which is the accumulation of the net income/loss over the years less dividends paid) and common shares.

Hence in current year,

Total equity = $255,213 - $151,328

= $103,885

If retained earnings is $47,588 then common stock

= $103,885  - $47,588

= $56,297

Change to equity next year

= $55,000

Change to retained earnings

= $44,200 - $12,000

= $32,200

Hence change in common stock

= $55,000 - $32,200

= $22,800

Common stock balance

= $56,297  + $22,800

= $79,097