Question

A company has beginning net assets of $100,000 and ending net assets of $95,000. During the year, additional capital stock was sold for $8000, and dividends of $3000 were declared. Using the capital maintenance approach, the net income (loss) for the year is calculated as

A) $0
B) $(5000)
C) $5000
D)$(10,000)

Answer 1

Net income using the capital maintenance approach is found by adjusting the change in net assets with capital contributions and dividends. For this company, the calculation indicates a net loss of $2,000 for the year.

Step-by-step explanation:

The calculation of net income using the capital maintenance approach involves considering the change in net assets, adjusting for any additional capital stock sold, and deducting dividends declared. To solve this, one would start with the ending net assets of $95,000 and compare them to the beginning net assets of $100,000. The decrease in net assets is $5,000 (indicating a loss or reduction in net income).

However, since capital stock was sold for $8,000, this amount is an addition to net assets and not part of income. Similarly, dividends of $3,000 reduce net assets but are not considered an expense. Therefore, the net income (loss) would be calculated as the change in net assets plus dividends (-$5,000 + $3,000), giving us a net loss of $2,000 for the year.