A corporation had the following assets and liabilities at the beginning and end of this year.

Exercise 2-15 Computing net income LO A1

A corporation had the following assets and liabilities at the beginning and end of this year.

	Assets	Liabilities
Beginning of the year	$ 119,000	$ 51,015
End of the year	177,000	71,685

1. Owner made no investments in the business, and no dividends were paid during the year.
2. Owner made no investments in the business, but dividends were $1,350 cash per month.
3. No dividends were paid during the year, but the owner did invest an additional $45,000 cash in exchange for common stock.
4. Dividends were $1,350 cash per month, and the owner invested an additional $35,000 cash in exchange for common stock.

Determine the net income earned or net loss incurred by the business during the year for each of the above separate cases:
 

Explanation

	Assets		–	Liabilities		=	Equity
Beginning of the year	$	119,000	–	$	51,015	=	$	67,985
End of the year		177,000	–		71,685	=		105,315
Net increase in equity							$	37,330

 
a.

Net income	$	37,330
Plus owner investments		0
Less dividends		(0	)
Change in equity	$	37,330

Since there were no additional investments or dividends, the net income for the year equals the net increase in equity.
 
b.

Net income	$	53,530
Plus owner investments		0
Less dividends ($1,350/mo. × 12 mo.)		(16,200	)
Change in equity	$	37,330

The dividends were added back because they reduced equity without reducing net income.

c.

Net income	$	(7,670	)
Plus owner investment		45,000
Less dividends		(0	)
Change in equity	$	37,330

The investment was deducted because it increased equity without creating net income.

d.

Net income	$	18,530
Plus owner investment		35,000
Less dividends ($1,350/mo. × 12 mo.)		(16,200	)
Change in equity	$	37,330

The dividends were added back because they reduced equity without reducing net income and the investments were deducted because they increased equity without creating net income.