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Information related to the Jones Company for the calendar year 2007 follows: Liabilities, December 31, 2007 $300 Assets, December 31, 2007 $700 Dividends Distributed during 2007 $90 Liabilities, December 31, 2006 $250 Assets, December 31, 2006 $500 Assuming no capital stock was issued during 2007, the net income earned by the Jones Company during 2007 was: a
Information related to the Jones Company for the calendar year 2007 follows:
| Liabilities, December 31, 2007 | $300 |
| Assets, December 31, 2007 | $700 |
| Dividends Distributed during 2007 | $90 |
| Liabilities, December 31, 2006 | $250 |
| Assets, December 31, 2006 | $500 |
Assuming no capital stock was issued during 2007, the net income earned by the Jones Company during 2007 was:
a. $60
b. $150
c. $240
d. $290
Expert Solution
Basic accounting equation is Assets = Liabilities + Equity
Therefore;
Equity, December 31, 2006 = Assets, December 31, 2006 - Liabilities, December 31, 2006
Equity, December 31, 2006 = $500 - $250
Equity, December 31, 2006 = $250
Equity, December 31, 2007 = Assets, December 31, 2007 - Liabilities, December 31, 2007
Equity, December 31, 2007 = $700 - $300
Equity, December 31, 2007 = $400
If there were no changes in capital stock during 2007 the only effect in equity would be the net income and dividends. Therefore, net income can be computed as follows:
| Equity, December 31, 2007 | $400 |
| Less: Equity, December 31, 2006 | 250 |
| Add: Dividends | 90 |
| Net Income, 2007 | $240 |
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