Question

Ken Young and Kim Sherwood organized Reader Direct as a corporation; each contributed $49,000 cash to start the business and received 4,000 shares. The store completed its first year of operations on December 31, 2017. On that date, the following financial items for the year were determined: cash on hand and in the bank, $47,500; amounts due from customers from sales of books, $26,900; property and equipment, $48,000; amounts owed to publishers for books purchased, $8,000; one-year note payable to a local bank for $2,850. No dividends were declared or paid to the shareholders during the year.

Required:
1. Complete the balance sheet at December 31, 2017.

2. Using the retained earnings equation and an opening balance of $0, work backward to compute the amount of net income for the year ended December 31, 2017.

3. As of December 31, 2017, did most of the financing for assets come from creditors or shareholders?

• Shareholders

• Creditors

4. Assuming that Reader Direct generates net income of $3,000 and pays dividends of $2,000 in 2018, what would be the company’s ending Retained Earnings balance at December 31, 2018?

Answer 1

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