Question

Abbie Marson is the sole owner and operator of Great Plains Company. As of the end of its accounting period, December 31, Year 1, Great Plains Company has assets of $910,049 and liabilities of $274,794. During Year 2, Marson invested an additional $28,651 and withdrew $25,020 from the business. What is the amount of net income during Year 2, assuming that as of December 31, Year 2, assets were $988,160 and liabilities were $234,792?

Answer 1

Answer:

The net income for Year 2 is $ 114,482

Explanation:

Accounting Equation is used in order to calculate the closing capital figure of Year 1 and Year 2:

Assets=Liabilities + Equity.

we can rearrange the formula as Assets-Liabilities = Equity

• So in Year 1. the closing capital is: $910,049-$274,794 = $635,255.
• In Year 2. the closing capital is : $988,160-$234,792 = $ 753,368

Now we can construct an equation to drive net income of year to by means of balancing figure:

Opening capital year 1:            $635,255

+ Additional Capital in Year 2: $28,651

-Drawing in year 2:                   $(25,020)

Net Income(Balancing figure)   $114,482              

Closing Capital Year 2:            $ 753,368              

Answer 2

Answer:

$114,482

Explanation:

The accounting equation shows the relationship between the various elements of the balance sheet. These are the assets, liabilities and equity. It may be expressed mathematically as

Assets = Liabilities + Equity

As such, for  Great Plains Company as at December 31, Year 1

Equity = $910,049 - $274,794

= $635,255

As at December 31, Year 2

Equity = $988,160 - $234,792

= $753,368

Change in equity between year 1 and 2

= $753,368  - $635,255

= $118,113

This difference or change in equity between December 31, year 1 and 2 is as a result of the following;

• amount withdrawn by the owner
• Additional amount invested by the owner
• Net income/loss of the business in year 2

As such,

$118,113 = $28,651 - $25,020 + net income

Net income = $118,113 - $28,651 + $25,020

= $114,482