Stosch Company's balance sheet reported assets of $40,000,liabilities of $15,000 and common stock of $12,000 as of December 31,Year 1.Retained earnings on the December 31,Year 2 balance sheet is $18,000 and Stosch paid a $14,000 dividend during Year 2.What is the amount of net income for Year 2?
A)$17,000
B)$19,000
C)$13,000
D)$21,000

Question

Quizplus · Accepted Answer

If assets on December 31,Year 1 totaled $40,000,total claims (including liabilities,common stock,and retained earnings)on that date must have also been $40,000.If liabilities were $15,000 and common stock was $12,000,retained earnings on December 31,Year 1 must have been $13,000.At the end of Year 2,the company reported $18,000 in retained earnings,a $5,000 increase.During Year 2,Stosch paid a $14,000 cash dividend,which reduced retained earnings.Therefore,Year 2 net income must have been $5,000 greater than the dividend paid.$14,000 + $5,000 = $19,000.

Stosch Company's Balance Sheet Reported Assets of $40,000,liabilities of $15,000