Question

a.) As of the end of the accounting period, December 31, Year 1, Great Plains Company has assets of $900,000 and liabilities of $300,000. During Year 2, stockholders invested an additional $75,000 in Great Plains Company and received $30,000 in dividends from Great Plains Company.

What is the amount of net income during Year 2, assuming that as of December 31, Year 2, assets were $995,000 and liabilities were $200,000?

b.) A firm hired an employee that will make $100 per day, and will be paid on the 1st and 15th of every month. Assume the employee works 10 days in each pay period.

Which of the following adjusting entries (if any) should the firm make at the end of each month assuming that the employee works the full 10 days in each pay period?

Answer 1

	Requirement a:
	Computaion of Net Income during Year 2:
A	Assets as at December 31, Year 1	$900,000
B	Liabilities as at December 31, Year 1	$300,000
C	Shareholders' Equity as at December, Year 1 (A-B)	$600,000
D	Assets as at December 31, Year 2	$995,000
E	Liabilities as at December 31, Year 2	$200,000
F	Shareholders' Equity as at December, Year 2 (D-E)	$795,000
G	Increase in Shareholders' Equity (F-C)	$195,000
H	Investments by stockholders	$75,000
I	Retained Earnings as at December, Year 2 (G-H)	$120,000
J	Dividend paid	$30,000
K	Net Income during Year 2 (I+J)	$150,000

Requirement 2:

Salary payable for each period = 10 days * $100 per day = $1,000

Since payment is made on 1st and 15th, salary for 10 days remains payable at the end of each month.

Adjusting entry:

Salary Expense a/c Dr $1,000

To Salary payable a/c $1,000

[Salary accrued for the period]