Question

ABC has the following balances on December 31 prior to closing entries: Revenues $25,000 Retained Earnings, Jan. 1 20,000 Cash 3,000 Expenses 10,000 Accounts Payable 4,000 Dividends 2,000 Supplies 17,000 Based upon the balances above, what net adjustment would be made to Retained Earnings due to closing entries?

Answer 1

Answer:

The net adjustments to be made to retained earnings due to the closing entries would be net income of $15,000 ($25,000 - $10,000) and dividends of $2,000.

Explanation:

Retained earnings is the accumulated amount of net income left after payment of dividends to shareholders. The adjustments usually made to retained earnings relate to net income and dividends (cash or stock). While the former is usually added to retained earnings, the latter is usually deducted.

In the question, the only relevant adjustments are net income of $15,000 ($25,000 - $10,000) and dividends of $2,000; every other account relates to other balance sheet components (either assets or liabilities). Therefore, the adjusted retained earnings balance at the end of the year would be: $20,000 + $15,000 - $2,000 = $33,000 (adjusted retained earnings).