Question

The Baldwin Company currently has the following balances on their balance sheet: Total Liabilities $68,188 Common Stock $10,959 Retained Earnings $86,023 Suppose next year the Baldwin Company generates $36,500 in net profit and pays $15,000 in dividends and total liabilities and common stock remain unchanged. What must their total assets be next year

Answer 1

$186,670

Step-by-step explanation:

As we know the

Total Assets = Total equity + Total Liability

AS we know that the common stock account and retained earning account are equity accounts

Total Assets = ($10,959 + $86,023) + $68,188

Total Assets = $165,170

Retained Earning is the accumulated balance of all the prior year's income / losses after paying all the dividend. This balance can be used for the dividend payment or reinvestment in the business.

Balance of Retained Earning = $86,023

Net Income = $36,500

Dividend Payment = $15,000

As we know net income is added to the retained earning and net loss is deducted. Dividend is the payment of earning of the company to stockholders so, it is deducted from it.

New balance of Retained Earning = $86,023 + $36,500 - $15,000 = $107,523

Now we need to calculate total assets

Total Assets = ($10,959 + $107,523) + $68,188 = $186,670

Answer 2

Total assets next year are $186670

Step-by-step explanation:

The basic accounting equation states that Total assets are always equal to the sum of Total liabilities and total equity. Thus, the total assets of the company this year are,

Total assets - this year = 68188 + (10959 + 86023)

Total assets - this year = $165170

The net income generated by a company is used for two purposes. The company can either pay out dividends from it or retain it in the business or do both. The retained net income will increase the amount of retained earnings and thus the total equity.

Retained earnings for next year = 36500 - 15000 = $21500

Thus, total assets for next year are,

Total assets next year = Total assets this year + change in retained earnings

Total assets next year = 165170 + 21500 = $186670