Stockholders' equity for Commerce Corporation on January 1, 2010 and December 31, 2010 were $60,000 and $75,000, respectively. Assets on January 1, 2010 and December 31, 2010 were $115,000 and $105,000, respectively. Liabilities on January 1, 2010 were $55,000. What is the amount of liabilities on December 31, 2010?

Question

Quizplus · Accepted Answer

The increase in stockholders' equity from $60,000 to $75,000 is $15,000. Assuming that there were no stock issuances or repurchases during the year, this increase would have come from net income for the period, which would have been added to retained earnings. Therefore, net income for the year is $15,000.

We know that assets decreased by $10,000 during the year. If liabilities had remained the same, this would have resulted in a decrease in stockholders' equity of $10,000, since Equity = Assets - Liabilities. However, we know that stockholders' equity actually increased by $15,000, so liabilities must have decreased by $25,000 (the difference between the actual increase in equity and the expected decrease due to the decrease in assets).

Therefore, liabilities on December 31, 2010 were $55,000 - $25,000 = $30,000. The correct answer is C.

Stockholders' Equity for Commerce Corporation on January 1, 2010 and December