Question

At the beginning of its current fiscal year, Willie Corp.’s balance sheet showed assets of $13,400 and liabilities of $5,200. During the year, liabilities decreased by $1,400. Net income for the year was $2,850, and net assets at the end of the year were $8,950. There were no changes in paid-in capital during the year. Required: Calculate the dividends, if any, declared during the year.

Answer 1

Answer:

Willie Corp.

Calculation of dividends during the year:

Dividends  = $5,900 ($14,850 - $8,950)

The difference between the accounting equation of Assets = Liabilities + Equity

Explanation:

Past Fiscal Year:

Assets = $13,400

Liabilities = $5,200

Equity = $8,200 ($13,400 - 5,200)

Current Fiscal Year:

Assets = $8,950

Liabilities = $3,800 ($5,200 - 1,400)

Equity = $8,200

Net Income = $2,850

Total Liabilities + Equity + Net Income = $14,850

Dividends paid = $5,900 ($14,850 - $8,950)

The solution is in the accounting equation, which states that Assets are equal to the Liabilities plus the Equity.  Any difference must therefore be an increase in equity (Retained Earnings) or a decrease (Net Loss or Dividends).  What reduces equity is the dividends paid out to stockholders or the loss incurred during the period.  Since there was a net income of $2,850, there was no loss, therefore, equity reduces as a result of dividends.