Equity theories

Determine the income under the following equity theories

Proprietary Theory

In Proprietary theory is a wealth concept where in the accounting entries should reflect the perspective of the owner . Under this theory Assets - Liabilities Owner 's Equity . The assets are assumed to be owned by the proprietor and the liabilities are his obligations Revenues are increases under this theory and liabilities decrease Therefore

Revenue 1 ,000 ,000

Less-Operating Expenses

Cost of goods sold 400 ,000

Depreciation expense 100 ,000

Salaries and Wages 200 ,000 700 ,000

Net

Income 300 ,000

Entity Theory

In entity theory the company is considered to be separate in existence with the owner . The financial statements are prepared in the perspectives of the entity , not its proprietors . Based on the equation in entity theory

Assets Equity

where

Equity Liabilities Stockholders Equity

Therefore

ENTITY THEORY

Revenues 1 ,000 ,000

Less-Operating Expenses

Cost of goods sold 400 ,000

Depreciation Expense 100 ,000

Salaries and Wages 200 ,000

Dividend 180 ,000

Interest Expense 30 ,000 810 ,000

Net Income 190 ,000

Residual Theory

In Residual Theory , common stockholders are considered to be the real owner of the business . This is used by the common stockholder to make better investment decision . The equation for this theory will be as follows

Asset - Specific equities Residual Equity Specific equities include the claims of the creditors and the equities of the common stocks

Therefore

RESIDUAL THEORY Revenues 1 ,000 ,000

Less-Operating Expenses

Cost of goods sold 400 ,000

Depreciation Expense 100 ,000

Salaries and Wages 200 ,000

Interest Expense 30 ,000 730 ,000

Net Income 270 ,000

Income Summary 270 ,000

Retained Earnings 270 ,000

To close Income to Retained Earnings

Retained Earnings , unadjusted 270 ,000

Less- Dividend for Stockholder 's 30 ,000

Excess for Common 240 ,000

Less-Dividend for Common Stockholder 's 100 ,000

Retained Earnings , adjusted 140 ,000

2 . Would any of your answers change if the stock is convertible at anytime at the ratio of 2 shares for 1 common stock

The values will change if the stocks is convertible anytime because converting them can possibly cause negative reactions from the market and can cause significant impact on the income and financial statement of the company...