What effect will the following closing entry have on the retained earnings account? Service Revenue 22,800...
What effect will the following closing entry have on the
retained earnings account?
| Service Revenue | 22,800 | |
| Interest Expense | 1750 | |
| Operating Expenses | 17,500 | |
| Retained Earnings | 3550 |
Select one:
a. Retained earnings will remain unchanged.
b. Retained earnings will be transferred to the income statement.
c. Retained earnings will increase by $3550.
d. Retained earnings will decrease by $3550.
Homework Answers
Solution:
A credit to Retained earnings account implies there is an increase in the balance of Retained earnings account.
A debit to Retained earnings account implies there is a decrease in the balance of Retained earnings account.
As per the entry given in the question there is a credit to the Retained earnings account of $ 3,550.
This implies that Retained earnings will increase by $3550.
Thus the solution is Option c. Retained earnings will increase by $3550.
The other options are incorrect due to the following reasons:
a.Retained earnings will remain unchanged.
A credit to the Retained Earnings account results in an increase in, the balance of Retained earnings account. Thus the statement that “Retained earnings will remain unchanged” is incorrect.
b. Retained earnings will be transferred to the income statement.
A credit of $ 3,550 to the Retained Earnings account results in an increase in the balance of Retained earnings account by $ 3,550. The balance of retained earnings account is shown under the Stock holder’s equity section, on the Liabilities side of the Balance sheet. Thus the statement “Retained earnings will be transferred to the income statement. “ is incorrect.
d. Retained earnings will decrease by $3550.
A credit of $ 3,550 to the Retained Earnings account results in an increase in the balance of Retained earnings account by $ 3,550. Thus the statement that “Retained earnings will decrease by $3550. ” is incorrect.
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