The Mystery of Owner's Contribution or Withdrawal
What additional contribution or withdrawal was made by the owner?
Given the following data:
Increase in assets: $60,000
Increase in liabilities: $20,000
Profit for the period: $48,000
Choose the correct option:
a. Contribution $8,000
b. Contribution $12,000
c. Drawings $8,000
d. Drawings $12,000
To determine the additional contribution or withdrawal made by the owner, we need to calculate the change in owner's equity. The change in owner's equity is equal to the profit for the period plus the additional contributions or minus the withdrawals made by the owner.
Given:
Increase in assets: $60,000
Increase in liabilities: $20,000
Profit for the period: $48,000
Change in owner's equity = Profit + Additional contributions/Withdrawals
Since the increase in assets and increase in liabilities affect the owner's equity in opposite ways, we can use the following equation to calculate the change in owner's equity:
Change in owner's equity = Increase in assets - Increase in liabilities
Change in owner's equity = $60,000 - $20,000
Change in owner's equity = $40,000
Now, we can determine whether there was an additional contribution or withdrawal made by the owner.
If the change in owner's equity is positive ($40,000), it indicates an additional contribution made by the owner.
If the change in owner's equity is negative (-$40,000), it indicates a withdrawal made by the owner.
In this case, since the change in owner's equity is positive ($40,000), it means that an additional contribution was made by the owner.
Therefore, the correct answer is option a. Contribution $8,000.