Lily Company had the following assets and liabilities on the dates indicated.
December 31
Total Assets
Total Liabilities
2009 $400,000 $250,000
2010 $460,000 $300,000
2011 $590,000 $400,000
Lily began business on January 1, 2009, with an investment of $100,000.
Instructions
From an analysis of the change in owner's equity during the year, compute the net income (or loss) for the following situations. (If a net loss, record amount using either a negative sign preceding the number eg -45 or parentheses eg (45).)
(a) 2009, assuming Lily's drawings were $15,000 for the year.
$
(b) 2010, assuming Lily made an additional investment of 50,000 and had no drawings in 2010.
$
(c) 2011, assuming Lily made an additional investment of $15,000 and had drawings of $30,000 in 2011.
$
For 2009 your equity is: Assets minus liabilities. So $400,000 - 250,000 = $150,000 and your owners investment was $100,000 which means that $150,000 Owners Equity contains $100,000 investment, so the other $50,000 is net income for year 2009.
Just use the ending 2009 numbers for assets, liabilities, owners equity and your ending 2010 numbers with any additional information to solve for your missing amounts for year 2010. For 2011 you will use ending 2010 numbers and ending 2011 numbers with any additional information provided to solve for the missing 2011 amounts.
To compute the net income (or loss) for each situation, we need to analyze the change in owner's equity during the year.
Owner's equity can be calculated using the formula:
Owner's Equity = Total Assets - Total Liabilities
We can use this formula to determine the owner's equity for each year.
(a) 2009, assuming Lily's drawings were $15,000 for the year:
Owner's equity at the beginning of 2009 = $100,000 (initial investment)
Total Assets at the end of 2009 = $400,000
Total Liabilities at the end of 2009 = $250,000
Owner's equity at the end of 2009 = Total Assets - Total Liabilities
Owner's equity at the end of 2009 = $400,000 - $250,000 = $150,000
Change in owner's equity = Owner's equity at the end of 2009 - Owner's equity at the beginning of 2009
Change in owner's equity = $150,000 - $100,000 = $50,000
Net income (or loss) for 2009 = Change in owner's equity - Drawings
Net income (or loss) for 2009 = $50,000 - $15,000 = $35,000
(b) 2010, assuming Lily made an additional investment of $50,000 and had no drawings in 2010:
Owner's equity at the beginning of 2010 = Owner's equity at the end of 2009 = $150,000
Total Assets at the end of 2010 = $460,000
Total Liabilities at the end of 2010 = $300,000
Owner's equity at the end of 2010 = Total Assets - Total Liabilities
Owner's equity at the end of 2010 = $460,000 - $300,000 = $160,000
Change in owner's equity = Owner's equity at the end of 2010 - Owner's equity at the beginning of 2010
Change in owner's equity = $160,000 - $150,000 = $10,000
Net income (or loss) for 2010 = Change in owner's equity - Drawings
Net income (or loss) for 2010 = $10,000 - $0 = $10,000
(c) 2011, assuming Lily made an additional investment of $15,000 and had drawings of $30,000 in 2011:
Owner's equity at the beginning of 2011 = Owner's equity at the end of 2010 = $160,000
Total Assets at the end of 2011 = $590,000
Total Liabilities at the end of 2011 = $400,000
Owner's equity at the end of 2011 = Total Assets - Total Liabilities
Owner's equity at the end of 2011 = $590,000 - $400,000 = $190,000
Change in owner's equity = Owner's equity at the end of 2011 - Owner's equity at the beginning of 2011
Change in owner's equity = $190,000 - $160,000 = $30,000
Net income (or loss) for 2011 = Change in owner's equity - Drawings
Net income (or loss) for 2011 = $30,000 - $30,000 = $0
To compute the net income or loss for each situation, we need to analyze the change in owner's equity during the year. Owner's equity represents the owner's investment, additional investments, net income, and any drawings made by the owner.
To calculate the net income or loss for each situation, we will use the following formula:
Net Income (or Loss) = (Owner's Equity at the end of the year) - (Owner's Equity at the beginning of the year) + (Additional Investments) - (Drawings)
Let's calculate the net income or loss for each situation:
(a) 2009, assuming Lily's drawings were $15,000 for the year:
Owner's Equity at the beginning of 2009 = Owner's Investment = $100,000
Owner's Equity at the end of 2009 = Total Assets (2009) - Total Liabilities (2009) = $400,000 - $250,000 = $150,000
Additional Investments = $0 (No additional investments in 2009)
Drawings = $15,000
Net Income (or Loss) = $150,000 - $100,000 + $0 - $15,000 = $35,000
Therefore, the net income for 2009 is $35,000.
(b) 2010, assuming Lily made an additional investment of $50,000 and had no drawings in 2010:
Owner's Equity at the beginning of 2010 = Owner's Equity at the end of 2009 = $150,000
Owner's Equity at the end of 2010 = Total Assets (2010) - Total Liabilities (2010) = $460,000 - $300,000 = $160,000
Additional Investments = $50,000
Drawings = $0
Net Income (or Loss) = $160,000 - $150,000 + $50,000 - $0 = $60,000
Therefore, the net income for 2010 is $60,000.
(c) 2011, assuming Lily made an additional investment of $15,000 and had drawings of $30,000 in 2011:
Owner's Equity at the beginning of 2011 = Owner's Equity at the end of 2010 = $160,000
Owner's Equity at the end of 2011 = Total Assets (2011) - Total Liabilities (2011) = $590,000 - $400,000 = $190,000
Additional Investments = $15,000
Drawings = $30,000
Net Income (or Loss) = $190,000 - $160,000 + $15,000 - $30,000 = $15,000
Therefore, the net income for 2011 is $15,000.