Question

Stosch Company's balance sheet reported assets of $107,000, liabilities of $28,000 and common stock of $25,000 as of December 31, Year 1. Retained Earnings on the December 31, Year 2 balance sheet is $70,000 and Stosch paid a $27,000 dividend during Year 2. What is the amount of net income for Year 2?

Answer 1

Answer-If the assets of Stosch Company's Balance sheet on Dec.31 Year 1 is totaled $107,000 then total claims (Including liabilities, common stock and retained earnings) must have also been same on that date. so

Year 1 Balance Sheet on December 31

Total Assets	$107,000
Liabilities	$28,000
Common Stock	$25,000
Retained Earnings ($107,000-$28,000-$25,000)	$54,000
Total Liabilities and Stockholders' Equity	$107,000

Computation of Net Income for Year 2

Retained Earnings reported in Year 2 Balance Sheet	$70,000
Add: Dividend paid	$27,000
	$97,000
Less: Beginning balance of retained earnings	$54,000
Net Income for Year 2	$43,000

Correct format is Beginning balance of retained earnings + Net Income - Dividend paid= Closing Balance of Retained Earnings

=$54,000+Net income -$27,000= $70,000

Net Income = $70,000+$27,000-$54,000

=$43,000

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