Question

1. Eizik Company was founded on Jan 1st 2014 by issuing 100,000 shares ($1 par value) for $400,000 in cash. Following are relevant transactions: – On July 1st 2014 the company declared and paid dividend to its shareholders in the amount of 20% out of company's shares par value. On Dec 31st 2014 the company took a $500,000 loan from the bank that is due back within 5 years and carries 10% annual interest rate to be paid from Dec 31st 2015. On May 1st 2015 the company issued 20,000 shares ($1 par value) for $100,000 in cash. On Nov 30th 2015 the company declared and paid dividend to its shareholders in the amount of 40% out of company's shares par value. — The net income for 2014 and 2015 is $250,000 and $400,000, respectively. What is the balance of the equity on Dec 31st 2015? a. $2,000,000 b. $1,072,000 c. $1,032,000 d. $1,150,000 e. $1,082,000

show work, no hand written work

Answer 1

Equity=Common stock+Additional paid-in capital+Retained earnings
Equity on Dec 31,2015:
						$
Initial issue of shares						400000
Dividend on July 1,2014			(100000*1*20%)		(Note:1)	-20000
Interest on loan to be paid on Dec 31,2015
(500000*10%)					(Note:2)	-50000
Shares issued on May 1,2015						100000
Dividend on May 1,2015			(100000+20000)*1*40%		(Note:1)	-48000
Net income for 2014					(Note:3)	250000
Net income for 2015					(Note:3)	400000
Total equity						1032000
Note:1
Dividend reduces retained earnings
Note:2
Interest payment reduces retained earnings
Note:3
Net income increases retained earnings
Answer is
c. $ 1032000