The Balance Sheet Equation. The Arcadia Company reported the following financial
ID: 2460125 • Letter: T
Question
The Balance Sheet Equation. The Arcadia Company reported the following financial results during its first two years of operations:
Year End
Assets
=
Liabilities
+
Shareholders’ Equity
Year 1
$80,000
=
$60,000
+
$20,000
Year 2
$70,000
=
$40,000
+
$30,000
Assuming that no dividends were declared and that no additional capital was invested in Year 2, determine Arcadia’s net income (or loss) for Year 2.
The problem tells you that no dividends were declared and that no additional capital was invested so the only thing left that would change the balance in Retained Earnings in Net Income/Net Loss. Meaning that is the only thing that would change Shareholders Equity in this problem
Year End
Assets
=
Liabilities
+
Shareholders’ Equity
Year 1
$80,000
=
$60,000
+
$20,000
Year 2
$70,000
=
$40,000
+
$30,000
Explanation / Answer
The Sareholder's equity has changed from $20000 to $30000 i.e an increase of $10000.
As no dividends were declared and no additional capital invested in the only reason for increase in shareholder's equity would be Retained earnings.
The increase in retained earnings is due to the net income earned during the period which is $10000.
Arcadia's net income for Year 2 = $10000.
Net income is added to the reatined earnings.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.