16. During the accounting year, a corporation’s assets increased by $70,000 and its liabilities increased by $25,000, and the corporation declared and paid dividends of $10,000. There were no transactions involving the corporation’s shares of stock and there were no transactions involving other comprehensive income. What was the corporation’s net income during the year?
Using the accounting equation, we can determine that the stockholders' equity has increased by $45,000 during the year: Asset increase of $70,000 = Liability increase of $25,000 + Stockholders' equity increase of $45,000.
The $45,000 increase in stockholders' equity is the net change in the following items:
+ Net income (which causes stockholders' equity to increase)
+ Issuing new shares of stock (which causes stockholders' equity to increase)
- Purchase of outstanding shares of stock (which causes stockholders' equity to decrease)
- Dividends declared (which causes stockholders' equity to decrease)
+/- Other comprehensive income
From the information given in the question, we know that during the accounting year there were dividends of $10,000, no new shares of stock issued or purchased, and no comprehensive income during the accounting year. Therefore, the $45,000 increase in stockholders' equity is the net change in these items:
For the math to work, the net income must have been $55,000.