Question

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Nelson Company experienced the following transactions during 2016, its first year in operation.
1. Issued $10,000 of common stock to stockholders.
2. Provided $6,300 of services on account.
3. Paid $2,600 cash for operating expenses.
4. Collected $3,900 of cash from accounts receivable.
5. Paid a $300 cash dividend to stockholders.
The amount of retained earnings appearing on Nelson Company's December 31, 2016 balance sheet is:
-$3,700.
-$2,700.
-$13,400.
-$3,400.

Answer 1

The amount of retained earnings appearing on Nelson Company's December 31, 2016 balance sheet is -$2,700.

Step-by-step explanation:

The amount of retained earnings appearing on Nelson Company's December 31, 2016 balance sheet is -$2,700.

Retained earnings is calculated by subtracting dividends from the net income of a company. In this case, the net income is calculated by adding the revenues (services provided on account and cash collected from accounts receivable) and subtracting the expenses (cash paid for operating expenses). So:

Net income = $6,300 + $3,900 - $2,600 = $7,600

Dividends = $300

Retained earnings = Net income - Dividends = $7,600 - $300 = $7,300

However, since the company is in its first year of operation, the retained earnings will be a deficit equal to the net loss, which is -$2,700 in this case.