Question

As of December 31, Year 1, Flowers Company had total assets of $130,000, total liabilities of $50,000, and common stock of $70,000. The company’s Year 1 income statement contained revenue of $30,000 and expenses of $18,000. The Year 1 statement of changes in stockholders’ equity stated that $3,000 of dividends were paid to investors. Required Determine the before-closing balance in the Retained Earnings account on December 31, Year 1. Determine the after-closing balance in the Retained Earnings account on December 31, Year 1. Determine the before-closing balances in the Revenue, Expense, and Dividend accounts on December 31, Year 1. Determine the after-closing balances in the Revenue, Expense, and Dividend accounts on December 31, Year 1. Explain the difference between common stock and retained earnings. On January 1, Year 2, Flowers Company raised $30,000 by issuing additional common stock. Immediately after the additional capital was raised, Flowers reported total stockholders’ equity of $110,000. Are the stockholders of Flowers in a better financial position than they were on December 31, Year 1?

Answer 1

1. The after-closing balance in the Retained Earnings account on December 31, Year 1 is $19,000.

2. The before-closing balance in the Revenue, Expense, and Dividend accounts on December 31, Year 1 is $9,000.

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 are not 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.

Data and Calculations:

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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