Christine Company's balance sheet as of December 31, 2018 showed total assets of $85,000, and total liabilities of $35,000, and common stock of $32,000. During 2019, the company reported revenues of $32,000, expenses of $25,000, and paid dividends of $8,000.
What was the balance in the Retained Earnings account on December 31, 2019?

Question

Quizplus · Accepted Answer

The balance in the Retained Earnings account on December 31, 2019, can be calculated by first determining the net income for 2019, which is revenues minus expenses ($32,000 - $25,000 = $7,000). Then, to find the beginning Retained Earnings, we use the accounting equation (Assets = Liabilities + Equity) to find the equity at the beginning of the year, which is $85,000 (Assets) - $35,000 (Liabilities) = $50,000. Since Equity = Common Stock + Retained Earnings, we have $50,000 = $32,000 (Common Stock) + Retained Earnings. Thus, the beginning Retained Earnings is $18,000. The ending Retained Earnings is the beginning Retained Earnings plus net income minus dividends paid, which is $18,000 + $7,000 - $8,000 = $17,000.

Christine Company's Balance Sheet as of December 31, 2018 Showed