Question

Exercise 1-21A (Static) Preparing financial statements—retained earnings emphasis LO 1-5, 1-6, 1-7, 1-8

On January 1, Year 3, the following information was drawn from the accounting records of Carter Company: cash of $800; land of $3,500; notes payable of $600; and common stock of $1,000.

Required
a. Determine the amount of retained earnings as of January 1, Year 3.
b. After looking at the amount of retained earnings, the chief executive officer (CEO) wants to pay a $1,000 cash dividend to the stockholders. Can the company pay this dividend?
c. As of January 1, Year 3, what percentage of the assets were acquired from creditors?
d. As of January 1, Year 3, what percentage of the assets were acquired from investors?
e. As of January 1, Year 3, what percentage of the assets were acquired from retained earnings?
f. Create an accounting equation using percentages instead of dollar amounts on the right side of the equation.
g. During Year 3, Carter Company earned cash revenue of $1,800, paid cash expenses of $1,200, and paid a cash dividend of $500. Record these events using the accounting equation.
g-1. Prepare an income statement dated December 31, Year 3.
g-2. Prepare a statement of changes in stockholders’ equity dated December 31, Year 3.
g-3. Prepare a balance sheet dated December 31, Year 3.
g-4. Prepare a statement of cash flows dated December 31, Year 3.
j. What is the balance in the Revenue account on January 1, Year 4?

Answer 1

Ans a)

As per accounting principle, Assets = Liabilities + Stockholder's Equity

i.e. Assets = Liabilities + (Common Stock + Retained Earnings)

Therefore,

Retained Earnings = Assets - Liabilities - Common Stock

= $4,300 - $600 - $1,000

= $2,700

Ans b)

No, the company cannot pay cash dividend of $1,000 as sufficient cash is not available with company for distribution. Cash available with company is $800.

Ans c)

Percentage of assets were acquired from creditors = Liabilities / Total Assets * 100

= $600 / ($800 + $3,500) * 100

= 13.95%

Ans d)

Percentage of assets were acquired from investors = Common Stock / Total Assets * 100

= $1,000 / $4,300 * 100

= 23.26%

Ans e)

Percentage of assets were acquired from retained earnings = Retained Earnings / Total Assets * 100

= $2,700 / $4,300 * 100

= 62.80%

Ans f)