Question

Gerald had beginning stockholders' equity of $160,000. During the year, total assets increased by $240,000 and total liabilities increased by $120,000. Gerald's net income was $180,000. No additional investments were made; however, dividends did occur during the year. How much were dividends?

Answer 1

To find out how much Gerald paid in dividends, we use the equity equation and the information about changes in assets and liabilities. The calculation shows that Gerald distributed $120,000 as dividends during the year.

Step-by-step explanation:

To calculate the amount of dividends distributed, we first need to understand the equity equation: Ending Equity = Beginning Equity + Net Income − Dividends. Given Gerald's beginning stockholders' equity was $160,000 and his net income was $180,000, the only unknown in this equation is the amount of dividends.

Since the total assets increased by $240,000 and total liabilities by $120,000, the increase in equity due to operations is $120,000 ($240,000 - $120,000). Therefore, ending equity would be Beginning Equity + Increase in Equity, which is $160,000 + $120,000 = $280,000. Now by including net income, we have $280,000 + $180,000 = $460,000. To find the dividends paid, we simply use the equity equation: $460,000 (Ending Equity) = $160,000 (Beginning Equity) + $180,000 (Net Income) - Dividends.

So, Dividends = $160,000 + $180,000 - $460,000, which equals $120,000. This is the amount distributed as dividends.