Schumacher Company uses the perpetual inventory system, and it engaged in the following transactions during 2014:
1) Started the business by issuing common stock for $7,500 cash
2) Paid cash to purchase $5,000 of inventory
3) Sold inventory that cost $3,000 for $7,250 cash
4) Incurred and paid operating expenses, $250
Schumacher Company engaged in the following transactions during 2015:
1) Paid cash to purchase $5,800 of inventory
2) Sold inventory that cost $7,000 for $15,150 cash
3) Incurred and paid operating expenses, $500
The amount of Retained Earnings at December 31, 2015 is:

Question

Quizplus · Accepted Answer

To calculate Retained Earnings, we need to know the net income (or loss) for each year. The net income (or loss) is calculated as revenue minus cost of goods sold minus operating expenses.

For 2014:
Revenue = $7,250
Cost of goods sold = $3,000
Operating expenses = $250
Net income = $7,250 - $3,000 - $250 = $4,000

For 2015:
Revenue = $15,150
Cost of goods sold = $7,000
Operating expenses = $500
Net income = $15,150 - $7,000 - $500 = $7,650

To calculate Retained Earnings, we start with the beginning balance (which is zero since the company just started in 2014) and add net income for each year.

Retained Earnings at December 31, 2014 = 0 + $4,000 = $4,000
Retained Earnings at December 31, 2015 = $4,000 + $7,650 = $11,650

Therefore, the correct answer is C.

Schumacher Company Uses the Perpetual Inventory System, and It Engaged