Question

Atlantic Corporation reported the following amounts at the end of the first year of operations: common stock $200,000; sales revenue $800,000; total assets $600,000; dividends declared $40,000; and total liabilities S320,OOO. What are Atlantics' retained earnings at the end of the year and what amount of expenses were incurred during the year?
A. Retained earnings are $80,000 and expenses incurred totaled S680,000.
B. Retained earnings are $80,000 and expenses incurred totaled $720,000.
C. Retained earnings are S280,OOO and expenses incurred totaled S480,000.
D. Retained earnings are S280,OOO and expenses incurred totaled S520,000.

Answer 1

Answer:

D. Retained earnings are $ 280,OOO and expenses incurred totaled $ 520,000.

Explanation:

We need to consider the accounting equation to determine the amount of retained earnings at end of year.

The accounting equation being:

Assets = Liabilities +  Stockholders' Equity

$ 600,000 = $ 320,000 + Stockholders' equity

so the Stockholders Equity is $ 280,000

For determining expenses, we use the following equation:

Revenue - Expenses = Net Income

Being the first year of operations, the net income equals to the retained earnings

$ 800,000 - Expenses = $ 280,000

So expenses are $ 800,000 - $ 280,000 = $ 520,000