Question

Packard Company engaged in the following transactions during Year 1, its first year of operations: (Assume all transactions are cash transactions.)
1) Acquired $1,050 cash from the issue of common stock.
2) Borrowed $520 from a bank.
3) Earned $750 of revenues.
4) Pald expenses of $270.
5) Pald a $70 dividend.

During Year 2, Packard engaged in the following transactions: (Assume all transactions are cash transactions.)

1) Issued an additional $425 of common stock.
2) Repaid $290 of its debt to the bank.
3) Earned revenues of $850.
4) Incurred expenses of $400.
5) Pald dividends of $120.

What is the amount of total stockholders' equity that will be reported on Packard's balance sheet at the end of Year 1?

a. $290
b. $1.460
c. $1.530
d. $980

Answer 1

Answer:

The correct answer is Option B.

Explanation:

Stockholders' equity comprises retained earnings, common stock and premium on common stock. Retained earnings are an accumulation of net income or loss over years. The effects of the transactions in Year 1 are as follows:

1) Acquired $1,050 cash from the issue of common stock - increase common stock and cash by $1,050

2) Borrowed $520 from a bank - this increases Cash and Liabilities by $520 - nil effect on stockholders' equity

3) Earned $750 of revenues - this increases net income/Retained Earnings by $750

4) Paid expenses of $270 - reduction in net income/Retained Earnings by $270

5) Paid a $70 dividend - reduces Retained Earnings by $70

Overall, stockholders' equity = $1,050 + $750 - $270 - $70 = $1,460