Question

Effect of net income on a firm’s balance sheet Conrad Air Inc. reported net income of $1,365,000 for the year ended December 31, 2020. Show how Conrad’s balance sheet would change from 2019 to 2020 depending on how Conrad “spent” those earnings as described in the scenarios that appear below.
Conrad Air Inc. Balance Sheet as of December 31, 2019
Assets Cash
Marketable securities Accounts receivable Inventories
Current assets
Equipment Buildings
Fixed assets Total assets
$ 120,000 35,000 45,000
$ 130,000 $ 330,000 $2,970,000 1,600,000 $4,570,000 $4,900,000
Liabilities and Stockholders’ Equity Accounts payable
Short-term notes Current liabilities Long-term debt Total liabilities
Common stock Retained earnings
Stockholders’ equity Total liabilities and equity
$ 70,000 55,000
$ 125,000 2,700,000 $2,825,000 $ 500,000 1,575,000 $2,075,000 $4,900,000
a. Conrad paid no dividends during the year and invested the funds in marketable securities.
b. Conrad paid dividends totaling $500,000 and used the balance of the net income to retire (pay off) long-term debt.
c. Conrad paid dividends totaling $500,000 and invested the balance of the net income in building a new hangar.
d. Conrad paid out all $1,365,000 as dividends to its stockholders.

Answer 1

Answer a:

If Conrad paid no dividends during the year and invested the funds in marketable​ securities, the amount transferred to the balance sheet will be ​$1,365,000.

The ending marketable securities will be $1,400,000. ​

The ending retained earnings will be $2,940,000.

Working:

Marketing securities ending balance = 35,000 + 1365000 = $1,400,000

Retained earnings = 1,575,000 + 1,365,000 = $2,940,000

Answer b:

If Conrad paid dividends totaling $500,000 and used the balance of the net income to retire​ (pay off)​ long-term debt, the amount transferred to the balance sheet will be $865,000

The ending​ long-term debt will be $1,835,000.​

The ending retained earnings will be $2,440,000.

Workings:

Amount transferred to balance sheet = Net Income - dividend = 1365000 - 504000 = $861,000

Long term debt = 2700000 - 865000 = $1,835,000

Retained earnings = 1575000 + 865000 = $2,440,000

Answer c:

If Conrad paid dividends totaling $500,000 and invested the balance of the net income in building a new​ hangar, the amount transferred to the balance sheet will be $865,000.

The ending buildings will be $2,465,000

The ending retained earnings will be $2,440,000.

Working:

The ending buildings = 1,600,000 + 865000 =2465000

Retained earnings = 1575000 + 865000 = $2,440,000

Answer d:

If Conrad paid out all $1,365,000 as dividends to its​ stockholders, the amount transferred to the balance sheet will be $0.

The ending retained earnings will be $1,575,000