91Ó°ÊÓ

Four different proprietorships, Jupiter, Mercury, Saturn, and Venus, show the same balance sheet data at the beginning and end of a year. These data, exclusive of the amount of owner’s equity, are summarized as follows: Total Assets Total Liabilities Beginning of the year \( 810,000 \)324,000 End of the year 1,296,000 540,000 On the basis of the above data and the following additional information for the year, determine the net income (or loss) of each company for the year. (Hint: First determine the amount of increase or decrease in owner’s equity during the year.) Jupiter: The owner had made no additional investments in the business and had made no withdrawals from the business. Mercury: The owner had made no additional investments in the business but had withdrawn \(72,000. Saturn: The owner had made an additional investment of \)162,000 but had made no withdrawals. Venus: The owner had made an additional investment of \(162,000 and had withdrawn \)72,000.

Step by step solution

01

Calculate Initial and Final Owner's Equity

The formula for Owner's Equity is given by: \[\text{Owner's Equity} = \text{Total Assets} - \text{Total Liabilities} \]To find the Owner's Equity at the beginning of the year, substitute the given values: \[\text{Beginning Owner's Equity} = 810,000 - 324,000 = 486,000\] At the end of the year, substitute the given values: \[\text{End Owner's Equity} = 1,296,000 - 540,000 = 756,000\]

02

Determine the Change in Owner's Equity

Calculate the change in Owner's Equity from the beginning to the end of the year: \[\Delta \text{Owner's Equity} = \text{End Owner's Equity} - \text{Beginning Owner's Equity} = 756,000 - 486,000 = 270,000\] This represents the total increase in Owner's Equity for all companies combined.

03

Calculate Net Income for Jupiter

For Jupiter, there were no additional investments or withdrawals. Therefore, the net income is equal to the change in Owner's Equity.\[\text{Net Income (Jupiter)} = 756,000 - 486,000 = 270,000\]

04

Calculate Net Income for Mercury

For Mercury, the owner withdrew \(72,000\). The net income is the increase in Owner's Equity plus the amount withdrawn: \[\text{Net Income (Mercury)} = (756,000 - 486,000) + 72,000 = 270,000 + 72,000 = 342,000\]

05

Calculate Net Income for Saturn

For Saturn, there was an additional investment of \(162,000\). Therefore, the net income is the change in Owner's Equity minus this investment: \[\text{Net Income (Saturn)} = (756,000 - 486,000) - 162,000 = 270,000 - 162,000 = 108,000\]

06

Calculate Net Income for Venus

For Venus, there was both an additional investment of \(162,000\) and a withdrawal of \(72,000\). The net income is the change in Owner's Equity minus this investment plus the withdrawal:\[\text{Net Income (Venus)} = (756,000 - 486,000) - 162,000 + 72,000 = 270,000 - 162,000 + 72,000 = 180,000\]

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91Ó°ÊÓ!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Owner's equity

Owner's equity is a crucial concept in accounting that represents the residual interest in the assets of a business after deducting liabilities. In simple terms, it's what the owner really owns in the business. It's calculated using the formula: \[ \text{Owner's Equity} = \text{Total Assets} - \text{Total Liabilities} \]This equation underscores the relationship between what a business owns (assets) and what it owes (liabilities), with the leftover balance being the owner’s claim on its resources. Owner's equity can increase through profits generated by the business or additional investments made by the owner. Conversely, it can decrease via losses or withdrawals made by the owner. Understanding how owner's equity works is essential for evaluating the financial health and the true value of a business.

Balance sheet

The balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It includes three main components: assets, liabilities, and owner's equity.

• Assets are what a company owns and include cash, inventory, and property.
• Liabilities are what a company owes, such as loans and accounts payable.
• Owner's equity is the ownership interest in the company, comprising both invested capital and retained earnings.

The balance sheet follows the fundamental accounting equation: \[ \text{Assets} = \text{Liabilities} + \text{Owner's Equity} \]This equation ensures that the balance sheet remains balanced, reflecting an accurate financial state of the business. A well-prepared balance sheet offers insights into a company’s operational efficiency and can be critical for strategic decision-making.

Net income calculation

Calculating net income is a vital part of understanding a business’s profitability over a certain period. Net income, sometimes referred to as net profit, is the total revenue minus all expenses, taxes, and costs of goods sold. For proprietorships, it can be affected by additional investments or withdrawals by the owner. The process involves the following steps:

• Determine the change in owner's equity over the period by calculating the difference between the beginning and ending owner's equity.
• Account for any additional contributions made by the owner by subtracting these from the change in owner’s equity.
• Add back any owner withdrawals to the change in owner's equity since these do not affect profitability.

The resulting figure is the net income for the business. This metric is important as it shows how well the company is generating profit from its operations, providing indications of the business’s overall financial health.

Proprietorship accounting

Proprietorship accounting refers to the accounting practices used by a sole proprietor, where a single individual manages and owns the entire business. This form of accounting focuses heavily on the owner's equity, and all business transactions are recorded from the owner's perspective. Key characteristics include:

• Owner responsible for all debts and obligations, affecting personal financial liability.
• Ease of setup with less regulatory requirements compared to other business forms.
• All profits are directly for the owner, but this also includes bearing any losses.

The simplicity of proprietorship accounting makes it suitable for small businesses, as it closely ties personal and business finances. However, it is essential for owners to maintain accurate records to understand the business's performance and meet tax obligations. Proper tracking of investments and withdrawals is critical, as these directly impact net income calculations and the overall financial outlook.