Question

If Boward Co. has Common Stock of $5,000, total assets of $85,000, and total liabilities of $35,000, its Retained Earnings equals:

a. $10,000
b. $45,000
c. $50,000
d. $55,000

Answer 1

The correct answer to the question is b. $45,000. This is found by using the accounting equation Assets = Liabilities + Shareholders' Equity and rearranging it to solve for Retained Earnings.

Step-by-step explanation:

To calculate a company's Retained Earnings, we need to understand the basic accounting equation which states that Assets = Liabilities + Shareholders' Equity. Shareholders' Equity can be broken down into Common Stock and Retained Earnings. So, if we want to find Retained Earnings, we rearrange the equation to be Retained Earnings = Assets - (Liabilities + Common Stock).

In the case of Boward Co., the total assets are given as $85,000, total liabilities are $35,000, and the Common Stock is valued at $5,000. Plugging these numbers into the equation, we get:

Retained Earnings = $85,000 - ($35,000 + $5,000) = $85,000 - $40,000 = $45,000.

Thus, the correct answer is b. $45,000.