Question

On January 1, 2018, the following information was drawn from the accounting records of Carter Company: cash of $400; land of $2,400; notes payable of $700; and common stock of $1,540.

Required

1. a. Determine the amount of retained earnings as of January 1, 2018.

2. b. After looking at the amount of retained earnings, the chief executive officer (CEO) wants to pay a $500 cash dividend to the stockholders. Can the company pay this dividend?

3. c. As of January 1, 2018, what percentage of the assets were acquired from creditors?

4. d. As of January 1, 2018, what percentage of the assets were acquired from investors?

5. e. As of January 1, 2018, what percentage of the assets were acquired from retained earnings?

6. f. Create an accounting equation using percentages instead of dollar amounts on the right side of the equation.

7. g. During 2018, Carter Company earned cash revenue of $660, paid cash expenses of $380, and paid a cash dividend of $58. (Hint: It is helpful to record these events under an accounting equation before preparing the statements.)

8. g-1. Prepare an income statement dated December 31, 2018.

9. g-2. Prepare a statement of changes in stockholders’ equity dated December 31, 2018.

10. g-3. Prepare a balance sheet dated December 31, 2018.

11. g-4. Prepare a statement of cash flows dated December 31, 2018.

12. j. What is the balance in the Revenue account on January 1, 2019?

Answer 1

a. Retained Earnings = Assets - Liabilities - Common Stock
= $400+2400 - 700 - 1540 = $560

b. Yes company can pay $500 dividend, since retained earnings balance is greater than $500.

c. Percentage of assets acquired from creditors = $700 / (400+2400) = 25%

d. Percentage of assets acquired from investors = $1540 / (400+2400) = 55%

e. Percentage of assets acquired from retained earnings = $560 / (400+2400) = 20%

f.

Cash	Land	Notes Payable	Common Stock	Retained Earnings
$                     400	$               2,400	25%	55%	20%

g.

Cash	Land	Notes Payable	Common Stock	Retained Earnings
$                     400	$               2,400	$               700	$              1,540	$               560	Beg Bal
$                     660				$               660	Revenue
$                    (380)				$              (380)	Expenses
$                      (58)				$                (58)	Dividend
$                     622	$               2,400	$               700	$              1,540	$               782

g-1

Income Statement
Revenue	$                     660
Expenses	$                     380
Net Income	$                     280

g-2

Statement of Changes in Stockholder's Equity
	Common Stock	Retained Earnings	Total
Beginning Balance	$                  1,540	$                   560	$            2,100
Add Net Income		$                   280	$               280
Less Dividend		$                     58	$                 58
Ending Balance	$                  1,540	$                   782	$            2,322

g-3

Balance Sheet
Assets
Cash	$                     622
Land	$                  2,400
Total Assets	$                  3,022
Liabilities & Stockholder's Equity
Notes payable	$                     700
Stockholder's Equity
Common Stock	$                  1,540
Retained Earnings	$                     782
Total Stockholder's Equity	$                  2,322
Total Liabilities & Stockholder's Equity	$                  3,022

g-4

Statement of Cash Flows
Cash flows from Operating Activities
Cash Received from Customers	$                     660
Cash paid for Expenses	$                    -380
Net Cash flows from Operating Activities	$                     280
Cash flows from Investing Activities	$                        -
Cash flows from Financing Activities	$                        -
Cash Dividend Paid	$                      -58
Net Cash Used in Financing Activities	$                      -58
Net Change in Cash	$                     222
Beginning Cash Balance	$                     400
Ending Cash Balance	$                     622

j. Balance in revenue account on January 1, 2019 will be zero, since revenue account is temporary account and closed at end of the year.