Question

What is the impact of the following transactions on the company's retained earnings?

a. Borrowed $18,289 from banks due in two years.
b. Purchased addition to plant and equipment for $25,000.
(A) Increased by $6,711
(B) Decreased by $6,711
(C) No impact
(D) Cannot be determined from the information given

Answer 1

The given transactions of borrowing money and purchasing plant equipment do not affect the company's retained earnings. Retained earnings are influenced by net income and shareholder distributions, not by financing and investing activities. There the correct options is c). No impact.

Step-by-step explanation:

The impact of the transactions on a company's retained earnings can be analyzed as follows:

(a) Borrowing $18,289 from banks to be due in two years is a financing activity and does not affect retained earnings. It increases both the liabilities (loans payable) and the assets (cash) on the balance sheet.

(b) Purchasing additional plant and equipment for $25,000 is an investing activity. This use of cash will decrease the company's assets (cash) and will not affect the retained earnings directly unless it's fully paid from them, which is not indicated.

Neither borrowing money nor purchasing assets directly impacts retained earnings, as these accounts reflect operational performance (net income or loss) rather than financing and investing activities. Therefore, the correct impact of both transactions on the company's retained earnings is:

C) No impact

Retained earnings are primarily changed by net income derived from the company's earnings and by distributions to shareholders in the form of dividends.

Answer 2

Neither borrowing money from banks nor purchasing additional plant and equipment directly impacts a company's retained earnings, as these transactions do not affect the income statement immediately.

Step-by-step explanation:

The impact of the following transactions on the company's retained earnings is as follows:

• Borrowing $18,289 from banks due in two years is a liability and does not immediately affect retained earnings since it is debt taken on by the company and not an income statement activity.
• Purchasing plant and equipment for $25,000 is an investment in assets. This transaction would typically be recorded as a capital expenditure and does not affect the retained earnings directly, unless and until depreciation expense is recorded in the income statement over the assets' useful lives.

Therefore, the correct answer is (C) No impact on retained earnings because neither borrowing money nor purchasing assets directly affects the income statement, which in turn means there is no immediate change to retained earnings.