Question

Stosch Company's balance sheet reported assets of $57,000, liabilities of $18,000 and common stock of $15,000 as of December 31, Year 1. Retained Earnings on the December 31, Year 2 balance sheet is $30,000 and Stosch paid a $17,000 dividend during Year 2. What is the amount of net income for Year 2?

Answer 1

The net income for Year 2 is $23000

Step-by-step explanation:

A Net income of a company in a particular year can be found by adding the dividends paid out by the company in that year and the additions to the retained earnings because company uses the net income for either or both of the purposes.

Net Income = Dividends + Additions in Retained Earnings

The basic accounting equation is,

Assets = Liabilities + Equity

Where Equity contains both common stock and retained earnings.

The Retained earnings at start of year 2 were,

57000 = 18000 + 15000 + Retained earnings

57000 = 33000 + Retained earnings

Retained earnings = 57000 - 33000

Retained earnings = $24000

The additions in retained earnings in Year 2 were = 30000 - 24000 = $6000

Thus, the net income for Year 2 was = 17000 + 6000 = $23000