1. The after-closing balance in the Retained Earnings account on December 31, Year 1 is <u>$19,000</u>.
2. The before-closing balance in the Revenue, Expense, and Dividend accounts on December 31, Year 1 is <u>$9,000</u>.
3. The difference between common stock and retained earnings is that the common stock is the capital contribution of stockholders, and the retained earnings are undistributed profits in the business.
4. The stockholders of Flowers <u>are not</u> in a better financial position than they were on December 31, Year 1 because no profits were made in Year 2. Instead, the company distributed $9,000 from its retained earnings.
<h3>Data and Calculations:</h3>
December 31, Year 1
Total assets = $130,000
Total liabilities = $50,000
Equity = $80,000 ($130,000 - $50,000)
Common Stock = $70,000
Retained Earnings = $10,000 ($80,000 - $70,000)
Year 1 income statement
Revenue of $30,000
Expenses of $18,000
Net income = $12,000 ($30,000 - $18,000)
Dividends = 3,000
Retained earnings c/f = $9,000 ($12,000 - $3,000)
Ending Equity = $89,000 ($80,000 + $9,000)
Common Stock = $70,000
Ending Retained earnings = $19,000 ($89,000 - $70,000)
Additional Common Stock $30,000
Total stockholders’ equity of $110,000
Beginning Common Stock $70,000
Additional Common Stock 30,000
Ending Common Stock $100,000
Retained Earnings $10,000
Total equity = $110,000
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