Question

Packard Company engaged in the following transactions during Year 1, its first year of operations. (Assume all transactions are cash transactions.)

1. 1) Acquired $1,950 cash from the issue of common stock.
2. 2) Borrowed $1,420 from a bank.
3. 3) Earned $1,600 of revenues cash.
4. 4) Paid expenses of $450.
5. 5) Paid a $250 dividend.

During Year 2, Packard engaged in the following transactions. (Assume all transactions are cash transactions.)

1. 1) Issued an additional $1,325 of common stock.
2. 2) Repaid $920 of its debt to the bank.
3. 3) Earned revenues of $1,750 cash.
4. 4) Incurred expenses of $760.
5. 5) Paid dividends of $300.

The amount of retained earnings on Packard’s Year 2 balance sheet is:

Multiple Choice

• $1,590.

• $2,290.

• $1,890.

• $2,515.

Answer 1

The amount of retained earnings on Packard’s Year 2 balance sheet is: $1,590.

• Retained earnings is the accumulated net income of a business that is retained after distribution to its shareholders.
• Retained Earnings at the end of the period = Beginning Retained Earnings + Net Income (Net Loss) - Cash Dividends - Stock Dividends
• 
  Revenue Expenses Net Income Income Statement Year 1 Year 2 $ 1,600 $1,750 $ (450) $ (760) $ 1,150 $ 990 Statement of Retained Earnings Year 1 Year 2 Beginning balance $ - $ 900 Add: Net Income $ 1,150 $ 990 Less: Dividends $ (250) $ (300) Ending balance $ 900 $ 1,590
  
• Beginning balance of Year 1 = 0 since it is the first year of operation.
• Ending balance of Year 1 is the beginning balance of Year 2.