The Baldwin Company currently has the following balances on their balance sheet: Total Liabilities $68,188 Common Stock $10,959 Retained Earnings $86,023 Suppose next year the Baldwin Company generates $36,500 in net profit and pays $15,000 in dividends and total liabilities and common stock remain unchanged. What must their total assets be next year

Total assets next year are $186670

Explanation:

The basic accounting equation states that Total assets are always equal to the sum of Total liabilities and total equity. Thus, the total assets of the company this year are,

Total assets - this year = 68188 + (10959 + 86023)

Total assets - this year = $165170

The net income generated by a company is used for two purposes. The company can either pay out dividends from it or retain it in the business or do both. The retained net income will increase the amount of retained earnings and thus the total equity.

Retained earnings for next year = 36500 - 15000 = $21500

Thus, total assets for next year are,

Total assets next year = Total assets this year + change in retained earnings

Total assets next year = 165170 + 21500 = $186670