Question

The following information was drawn from the accounting records of Wyckoff Company as of December 31, Year 2, before the temporary accounts had been closed. The Cash balance was $3,600, and Notes Payable amounted to $4,000. The company had revenues of $7,500 and expenses of $3,400. The company’s Land account had a $8,000 balance. Dividends amounted to $1,000. The balance of the Common Stock account was $2,000.

Required:
A. Identify which accounts would be classified as permanent and which accounts would be classified as temporary.
B. Assuming that Wyckoff's beginning balance (as of January 1, Year 2) in the Retained Earnings account was $2,500, determine its balance after the temporary accounts were closed at the end of Year 2.
C. What amount of net income would Wyckoff Company report on its Year 2 income statement?
D. Explain why the amount of net income differs from the amount of the ending Retained Earmings balance.
E. What are the balances in the revenue, expense, and dividend accounts on January 1, Year 3?

Answer 1

Wyckoff Company

A. Identification of permanent and temporary accounts:

Permanent:

Cash $3,600

Notes Payable $4,000

Land $8,000

Common Stock $2,000

Temporary:

Revenue $7,500

Expenses $3,400

Dividends $1,000

B. Retained Earnings balance, December 31, Year 2: $5,600

C. Amount of net income = $4,100

D. The net income of $4,100 does not include the beginning balance of retained earnings of $2,500 and the dividends.

E. The balances in the revenue, expense, and dividend accounts on January 1, Year 3 are $0, $0, and $0. They are not permanent accounts and as temporary accounts were closed to the Income Summary of Year 2.

Step-by-step explanation:

a) Data and Calculations:

Wyckoff company

Account balances as of December 31, Year 2:

Cash $3,600

Notes Payable $4,000

Revenue $7,500

Expenses $3,400

Land $8,000

Dividends $1,000

Common Stock $2,000

b) Wyckoff Income Statement

Revenue $7,500

Expenses $3,400

Net income $4,100

Retained Earnings Statement

Net Income $4,100

Balance, January 1 2,500

Dividends (1,000)

Balance, Dec. 31 $5,600