At the end of its first month of operations, Michael's Consulting Services reported net income of $25,000. They also had account balances of:
Cash, $18,000; Office Supplies, $2,000 and Accounts Receivable $10,000. The owner's total investment for this first month was $5,000. There were no owner withdrawals in the first month.
Calculate the ending balance in the Owner's Capital account to be reported on the Statement of Owner's Equity.
A) $20,000
B) $7,000
C) $30,000
D) $5,000
E) $25,000

Question

At the end of its first month of operations, Michael's Consulting Services reported net income of $25,000. They also had account balances of: 
Cash, $18,000; Office Supplies, $2,000 and Accounts Receivable $10,000. The owner's total investment for this first month was $5,000. There were no owner withdrawals in the first month.
Calculate the ending balance in the Owner's Capital account to be reported on the Statement of Owner's Equity.
A) $20,000
B) $7,000
C) $30,000
D) $5,000
E) $25,000

Quizplus · Accepted Answer

To calculate the ending balance in the Owner's Capital account, we need to use the accounting equation:

Assets = Liabilities + Owner's Equity

We know that the assets of the company are:

Cash = $18,000
Office Supplies = $2,000
Accounts Receivable = $10,000

Total Assets = $18,000 + $2,000 + $10,000 = $30,000

Since the company is new, we can assume that it does not have any liabilities yet. Therefore, the Owner's Equity must be:

Owner's Equity = Assets - Liabilities

Owner's Equity = $30,000 - 0 = $30,000

The owner's total investment in the first month was $5,000, so the beginning balance in the Owner's Capital account was $5,000. With net income of $25,000, the ending balance in the Owner's Capital account is:

Ending Balance in Owner's Capital account = Beginning Balance + Net Income

Ending Balance in Owner's Capital account = $5,000 + $25,000 = $30,000

Therefore, the correct answer is C ($30,000).

At the End of Its First Month of Operations, Michael's