Question

Tara Westmont, the stockholder of Tiptoe Shoes, Inc., had annual revenues of $185,000, expenses of $103,700, The company paid $18,000 cash in dividends to the owner (sole stockholder). The retained earnings account before closing had a balance of $297,000. The entry to close the Income Summary account at the end of the year, after revenue and expense accounts have been closed, is: a. Debit Retained Earnings $63,300; credit Income Summary $63,300 b. Debit Income Summary $63,300; credit Retained Earnings $63,300 c. Debit Retained Earnings $81,300; credit Income Summary $81,300 d. Debit Retained Earnings $297,000; credit Income Summary $297,000 e. Debit Income Summary $81,300; credit Retained Earnings $81,300

Answer 1

Option (e) is correct.

Step-by-step explanation:

Given that,

Annual revenues = $185,000

Expenses = $103,700

Dividends paid to the owner in cash = $18,000

Balance in the retained earnings before closing = $297,000

Income summary account at the year end is calculated by the difference of revenues and expenses.

Therefore, the income summary account at the end of the year is as follows:

= Total revenues - Total expenses

= $185,000 - $103,700

= $81,300

Hence, the journal entry is as follows:

Income summary A/c Dr. $81,300

To retained earnings $81,300

(To record the Income Summary account at the end of the year, after revenue and expense accounts have been closed)