Sanchez Company engaged in the following transactions during Year 1:1)Started the business by issuing $42,000 of common stock for cash.2)The company paid cash to purchase $26,400 of inventory.3)The company sold inventory that cost $16,000 for $30,600 cash.4)Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2:1)The company paid cash to purchase $35,200 of inventory.2)The company sold inventory that cost $32,800 for $57,000 cash.3)Operating expenses incurred and paid during the year, $18,000.Note: Sanchez uses the perpetual inventory system. What is the amount of retained earnings that will be shown on the balance sheet at December 31, Year 2?

Question

Quizplus · Accepted Answer

To calculate the amount of retained earnings, we need to first calculate the net income for each year:
Year 1:
Revenue: $30,600
COGS: $16,000
Gross Profit: $14,600
Operating expenses: $14,000
Net Income: $600

Year 2:
Revenue: $57,000
COGS: $32,800
Gross Profit: $24,200
Operating expenses: $18,000
Net Income: $6,200

To calculate the retained earnings at the end of Year 2, we need to add the net income for Year 2 to the retained earnings at the end of Year 1. Since there are no dividends mentioned, we can assume that all the net income is retained, and thus:
Retained Earnings at the end of Year 1: $600
Net Income for Year 2: $6,200
Retained Earnings at the end of Year 2: $6,800 (option C)

Sanchez Company Engaged in the Following Transactions During Year 1:1)Started