Sandhill’s shareholders’ equity consists only of common shares and retained earnings. Using the change in total shareholders’ equity calculated in above part, (50000) calculate the net income or loss for the year ended December 31, 2018, assuming each of the following independent scenarios:
1. Sandhill issued no common shares during the year and did not declare any dividends.
Net income or loss
$
2. Sandhill issued no common shares during the year and declared and paid dividends of $11,000.
Net income or loss
$
3. Sandhill issued $35,000 of additional common shares during the year and did not declare any dividends.
Net income or loss
$
4. Sandhill issued $20,000 of additional common shares during the year and declared and paid dividends of $11,000.
Net income or loss
$
My answers:
1. 50000
2.39000
3. 15000
4. 59000
I am fairly new to accounting so please help if I am wrong because ive tried a lot
To calculate the net income or loss for each scenario, you need to understand the relationship between shareholders' equity, net income, dividends, and the change in total shareholders' equity.
Here's how you can approach each scenario:
1. Sandhill issued no common shares during the year and did not declare any dividends.
In this scenario, the change in total shareholders' equity is given as (50000), meaning there was a decrease. Since there were no additional common shares issued and no dividends declared, the entire change in equity represents the net loss for the year. Therefore, the net income or loss would be $50,000.
2. Sandhill issued no common shares during the year and declared and paid dividends of $11,000.
Again, the change in total shareholders' equity is (50000). In this case, the net loss for the year would be the change in equity minus the dividends paid. So, it would be (50000) - $11,000 = ($61,000) or a net loss of $61,000.
3. Sandhill issued $35,000 of additional common shares during the year and did not declare any dividends.
Now, you need to consider the impact of issuing additional common shares. When new shares are issued, it increases the shareholders' equity. As given, the change in total shareholders' equity is (50000). Since $35,000 of additional common shares are issued, it means that $35,000 out of the (50000) decrease in equity is due to the issuance of new shares. Therefore, the remaining decrease in equity represents the net loss. The net income or loss would be (50000) - $35,000 = ($15,000) or a net loss of $15,000.
4. Sandhill issued $20,000 of additional common shares during the year and declared and paid dividends of $11,000.
Similar to scenario 3, the $20,000 of additional common shares issued will increase shareholders' equity. The change in total shareholders' equity is (50000). So, ($20,000) out of the (50000) decrease is due to the issuance of new shares. Accounting for the dividends paid of $11,000, the remaining decrease in equity represents the net loss. The net income or loss would be (50000) - $20,000 - $11,000 = ($59,000) or a net loss of $59,000.
Based on this explanation, the correct answers for each scenario are:
1. Net income or loss: $50,000
2. Net income or loss: ($61,000)
3. Net income or loss: ($15,000)
4. Net income or loss: ($59,000)