Question

Shep Company’s records show the following information for the current year.


---------------------Beginning of year / End of year

Total assets --- $ 52,400 / $ 83,000

Total liabilities ---$ 23,200 / $ 36,200


Determine net income (loss) for each of the following separate situations. (For all requirements, losses should be entered with a minus sign.)


a. Additional common stock of $4,200 was issued and dividends of $8,200 were paid during the current year.

b. Additional common stock of $15,300 was issued and no dividends were paid during the current year.

c. No additional common stock was issued and dividends of $13,200 were paid during the current year.


a Net income(loss) -

b Net income(loss) -

c Net income(loss) -

Answer 1

The net income (loss) for Shep Company in each separate situation is determined as follows:

a. Net income(loss) = $21,600

b. Net income(loss) = $2,300

c. Net income(loss) = $30,800

Data and Calculations:

                              Beginning            End of Year

Total assets           $52,400               $83,000

Total liabilities       $23,200               $36,200

Based on the accounting equation, Equity = Assets - Liabilities

• Equity at the beginning = $29,200 ($52,400 - $23,200)

• Equity at the end of the year = $46,800 ($83,000 - $36,200)

Situation a):

• Issuance of new common stock = $4,200

• Payment of dividends = $8,200

Situation b):

• Issuance of new common stock = $15,300

• Payment of dividends = $0

Situation c):

• Issuance of new common stock = $0

• Payment of dividends = $13,200

Shep's Equity at the end of the year = Equity at beginning + Additional Capital + Net income (loss) - Dividends paid

Situation a):

$46,800 = $29,200 + $4,200 + Net income (loss) - $8,200

$46,800 = $25,200 + Net income (loss)

Net income (loss) = $21,600 ($46,800 - $25,200)

Situation b):

$46,800 = $29,200 + $15,300 + Net income (loss) - $0

$46,800 = $44,500 + Net income (loss)

Net income (loss) = $2,300 ($46,800 - $44,500)

Situation c):

$46,800 = $29,200 + $0 + Net income (loss) - $13,200

$46,800 = $16,000 + Net income (loss)

Net income (loss) = $30,800 ($46,800 - $16,000)

The Equity at the end is made up of:

• Equity at the beginning
• Plus additional capital
• Plus net income or (loss)
• Minus dividends paid.

Thus, to determine the net income (loss) for each situation, the first item to be determined is the equity at the beginning and the equity at the end of the year.

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