Question

BE1-10 Go Ahead Limited began the year with common shares of $100,000 and retained earnings of $350,000. During the year, it issued an additional $25,000 of common shares, reported a profit of $75,000, and paid dividends of $5,000. (a) Calculate the ending balances of (1) common shares, (2) retained earnings, and (3) total shareholders' equity. (b) Explain how your answer would change if the company had reported a loss of $75,000 rather than a profit.

Answer 1

Answer
Explanation :
a) If net income is $75,000 and dividends paid,
Particulars	Ending Balance
Common Shares (i)	$            1,25,000
Retained earnings (ii)	$            4,20,000
Total Stockholders' equity (i+ii)	$            5,45,000
Calculations:
i) Common Shares
Beginning	$            1,00,000
Add : Additional	$               25,000
Total Ending Common Shares	$            1,25,000
ii) Retained Earnings
Beginning	$            3,50,000
Add : Profit	$               75,000
Less :Dividends	$                -5,000
Ending retained earnings	$            4,20,000
b) If Loss reported is $75,000 rather than a profit
Particulars	Ending Balance
Common Shares (i)	$            1,25,000
Retained earnings (iii)	$            2,75,000
Total Stockholders' equity (i+iii)	$            4,00,000
Calculations:
iii) Retained Earnings
Beginning	$            3,50,000
Less :Net loss	$              -75,000
Less :Dividends	$                       -
Total Ending retained earnings	$            2,75,000