Question

Ex 1-15 Net income and owner’s equity for four businesses

Four different proprietorships, Juliet, Kilo, Lima, and Mike, show the same balance sheet data at the beginning and end of a year. These data, exclusive of the amount of owner’s equity, are summarized as follows:

Total Assets Total Liabilities
Beginning of the year $ 600,000 $150,000
End of the year 1,125,000 500,000

On the basis of the above data and the following additional information for the year, determine the net income (or loss) of each company for the year. (Hint: First determine the amount of increase or decrease in owner’s equity during the year.)
Juliet: The owner had made no additional investments in the business and had made no withdrawals from the business.

Kilo: The owner had made no additional investments in the business but had withdrawn $55,000.

Lima: The owner had made an additional investment of $100,000 but had made no withdrawals.

Mike: The owner had made an additional investment of $100,000 and had withdrawn $55,000.

I get that Juliet has a net income increase by $175,000

But why is it telling me to add Kilo's withdraw of $55,000 versus subtracting it? So,I show Kilo has a net total of:$230,000 VERSUS $120,000, if I subtract it.

Answer 1

		JULIET
		Balance Sheet
			Current Year	Previous year
	A	Total Assets	$1,125,000	$600,000
	B	Total Liabilities	$500,000	$150,000
	C=A-B	Shareholders Equity	$625,000	$450,000
		Net Income (625000-450000)	$175,000
		KILO
		Balance Sheet
			Current Year	Previous year
	A	Total Assets	$1,125,000	$600,000
	B	Total Liabilities	$500,000	$150,000
	C=A-B	Shareholders Equity	$625,000	$450,000
	D	Increase in Shareholders Equity	$175,000
	E	Withdrawal	$55,000
	F=D+E	Net Income	$230,000
		Shareholders Equity in Current Year=(450000+230000-55000)=			$625,000
		LIMA
		Balance Sheet
			Current Year	Previous year
	A	Total Assets	$1,125,000	$600,000
	B	Total Liabilities	$500,000	$150,000
	C=A-B	Shareholders Equity	$625,000	$450,000
	D	Increase in Shareholders Equity	$175,000
	E	Additional Investment	$100,000
	F=D-E	Net Income	$75,000
		Shareholders Equity in Current Year=(450000+75000+100000)=			$625,000
		MIKE
		Balance Sheet
			Current Year	Previous year
	A	Total Assets	$1,125,000	$600,000
	B	Total Liabilities	$500,000	$150,000
	C=A-B	Shareholders Equity	$625,000	$450,000
	D	Increase in Shareholders Equity	$175,000
	E	Additional Investment	$100,000
	F	Withdrawal	$55,000
	G=D-E+F	Net Income	$130,000
		Shareholders Equity in Current Year=(450000+130000+100000-55000)=			$625,000
		Additional Investment increases shareholders equity
		Hence to arrive at net income we should subtract the additional investment from increase in equity
		Withdrawal decreases shareholders equity
		Hence to arrive at net income we should add the withdrawal to the increase in equity