Question

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Packard Company engaged in the following transactions during 2015, its first year in operations: (Assume all transactions are cash transactions.)
1) Acquired $1,400 cash from the issue of common stock.
2) Borrowed $870 from a bank.
3) Earned $1,050 of revenues.
4) Paid expenses of $340.
5) Paid a $140 dividend.
During 2016, Packard engaged in the following transactions: (Assume all transactions are cash transactions.)
1) Issued an additional $775 of common stock.
2) Repaid $535 of its debt to the bank.
3) Earned revenues of $1,200.
4) Incurred expenses of $540.
5) Paid dividends of $190.
The amount of retained earnings on Packard's 2016 balance sheet is
-$1,635.
-$1,230.
-$1,040.
-$1,520.

Answer 1

To find the retained earnings for 2016, we combine the retained earnings from the end of 2015 with the net income minus dividends for 2016. The ending retained earnings for 2016 is $1,040.

Step-by-step explanation:

To determine the amount of retained earnings on Packard's 2016 balance sheet, we need to calculate the retained earnings at the end of 2015 and then update this for the 2016 transactions.

For 2015, Packard's retained earnings can be calculated as follows:

• Beginning retained earnings: $0 (since it's the first year of operation)
• Add: Net income for 2015 (Revenues - Expenses) = $1,050 - $340 = $710
• Less: Dividends paid in 2015 = $140

Ending retained earnings for 2015 = $710 - $140 = $570

Next, we update the 2015 retained earnings for 2016 transactions:

• Beginning retained earnings for 2016 = $570
• Add: Net income for 2016 (Revenues - Expenses) = $1,200 - $540 = $660
• Less: Dividends paid in 2016 = $190

Ending retained earnings for 2016 = $570 + $660 - $190 = $1,040

Therefore, the amount of retained earnings on Packard's 2016 balance sheet is $1,040.