Question

Larkspur, Inc. had the following assets and liabilities on the dates indicated.

December 31	Total Assets	Total Liabilities
2018	$468,000	$324,000
2019	$548,000	$374,000
2020	$678,000	$474,000

Larkspur, began business on January 1, 2018, with an investment of $92,000 from stockholders.

From an analysis of the change in stockholders’ equity during the year, compute the net income (or loss) for:

(a) 2018, assuming Larkspur, paid $15,000 in dividends for the year.

Net income (loss) for 2018

$___________

(b) 2019, assuming stockholders made an additional investment of $45,000 and Larkspur, paid no dividends in 2019.

Net income (loss) for 2019

$____________

(c) 2020, assuming stockholders made an additional investment of $24,000 and Larkspur, paid dividends of $20,000 in 2020.

Net income (loss) for 2020 $_______________

Answer 1

Answer (a):

Year 2018:

Stockholders' equity as at December 31, 2018= Total assets - Total liabilities

= $468,000 - $324,000

= $144,000

Larkspur, began business on January 1, 2018, with an investment of $92,000 from stockholders

Hence:

Addition to Retained earnings / Retention = $144,000 - $92,000 = $52,000

Given that, dividend paid in 2018 = $15,000

Hence:

Net income for 2018 = Retention + Dividend paid = $52,000 + $15,000 = $67,000

Answer (b):

Year 2019:

Stockholders' equity as at December 31, 2019 = $548,000 - $374,000 = $174,000

Beginning balance of Stockholders' equity = $144,000

During 2019, stockholders made an additional investment of $45,000

Addition to Retained earnings / Retention in 2019 = $174,000 - ($144,000 + $45,000) = - $15,000

Given that, Larkspur, paid no dividends in 2019.

Hence net income (loss) for 2019 = ($15,000)

Answer (c):

Year 2020:

Stockholders' equity as at December 31, 2020 = $678,000 - $474,000 = $204,000

Beginning balance of Stockholders' equity = $174,000

During 2019, stockholders made an additional investment of $24,000

Addition to Retained earnings / Retention in 2019 = $204,000 - ($174,000 + $24,000) = $6,000

Given that, Larkspur, paid dividends in 2020 = $20,000

Hence net income (loss) for 2019 = $6,000 + $20,000 = $26,000