Question

The following information relates to Smoothie Incorporated.

Beginning assets = 200,000

Beginning liabilities = 124,000

Beginning equity = 76,000

Sales during the year = 617,000

Expenses (including taxes) during the year = 561,000

Dividends during the year = 14,000

Proceeds from the issuance of stock = 35,000

Ending assets = 285,000

Using the accounting equation, what is the ending balance of equity?

Answer 1

Owners’ equity can be classified according to the capital that has been contributed by the owners of the company as well as the earnings that have been retained in the company up to a specified point in time. This can be expressed by the following equation:

Owners’ equity = Contributed capital + Retained earnings

The income statement tells the story of how a company has performed over a specified period of time. The equation of the income statement is:

Sales – Expenses = Net income (loss)

It is transferred to equity as it can be retained or transferred as dividends

The dividends that are paid are deducted from equity because it is paid to the stockholders.

The Proceeds from the issuance of stock is added to equity as there are more stockholders.

So the expanded equation for equity is:

Ending balance of equity = Beginning equity + Sales during the year – Expenses(including taxes) during the year – Dividends+ Proceeds from the issuance of stock

=76,000+617,000-561,000-14,000+35,000

=153,000