Question

Toys Ltd had total assets of $60,000 and total liabilities of $40,000 at the beginning of the year. During the year the business recorded $100,000 in revenues, $55,000 in expenses, and dividends of $10,000 were distributed. Equity at the end of the year is

Select one:
a. $45,000
b. $65,000
c. $55,000
d. $35,000

Answer 1

To find the equity at the end of the year for Toys Ltd, we calculate the impact of revenues, expenses, and dividends on the initial assets and liabilities. The correct equity at the end of the year is $55,000.

Step-by-step explanation:

To calculate the equity at the end of the year for Toys Ltd, we start with the following information:

• Assets at the beginning of the year: $60,000
• Liabilities at the beginning of the year: $40,000

We know the formula for equity is:

Equity = Assets - Liabilities

We must also consider the impact of the company's revenue, expenses, and dividends throughout the year:

• Revenues increase equity as they represent income: +$100,000
• Expenses decrease equity as they represent costs: -$55,000
• Dividends decrease equity as they are distributions to shareholders: -$10,000

The net effect of the revenues, expenses, and dividends is calculated as follows:

+ $100,000 (revenues) - $55,000 (expenses) - $10,000 (dividends) = +$35,000

Therefore, the equity at the beginning of the year plus the net effect of the financial activities will give the equity at the end of the year:

$60,000 (beginning equity) - $40,000 (liabilities) + $35,000 (net effect of financial activities) = $55,000 (equity at the end of the year)

The correct answer is (c) $55,000.