Question

The assets of Lee’s business increased by $40,000 and the liabilities increased by $5,000 during the current year. If the profit for this period was $25,000, what additional contribution or withdrawal was made by the owner? (Assume only a withdrawal or a contribution was made).

Select one: a. Contribution $5,000 b. Drawings $5,000 c. Drawings $10,000 d. Contribution $10,000

Answer 1

Solution:
	Answer is d. Contribution $10,000
Working Notes:
	This Question is based on Accounting Equation.
	Total assets = Total liabilities + Equity or Capital
	And as per the accounting equation , both side of equation must have equal effect or at end must be equal .
	In our question , assets is increased by $40,000
	Liabilities is increased by $5,000
	Increase in Equity = Profit during the period + Contribution during the period
	Total assets = Total liabilities + Equity or Capital
	$40,000 = $5,000 + Profit during the period + Contribution during the period
	$40,000 = $5,000 + $25,000 + Contribution during the period
	Contribution during the period = $40,000 - $25,000 - $5,000
	Contribution during the period = $10,000
Please feel free to ask if anything about above solution in comment section of the question.