Question

Schumacher Company uses the perpetual inventory system, and it engaged in the following transactions during 2014:

1) Started the business by issuing common stock for $8,100 cash
2) Paid cash to purchase $5,200 of inventory
3) Sold inventory that cost $3,300 for $7,850 cash
4) Incurred and paid operating expenses, $270

Schumacher Company engaged in the following transactions during 2015:

1) Paid cash to purchase $6,300 of inventory
2) Sold inventory that cost $7,600 for $16,350 cash
3) Incurred and paid operating expenses, $540

The amount of Retained Earnings at December 31, 2015 is:

$7,060.

$4,550.

$12,050.

$12,490.

Answer 1

Step 1: Calculate Net Income for 2014 to be Transferred to Retained Earnings

The amount of net income for 2014 to be transferred to retained earnings is calculated as below:

Net Income Transferred to Retained Earnings = Sales for 2014 - Cost of Goods Sold for 2014 - Operating Expenses for 2014 = 7,850 - 3,300 - 270 = $4,280

This amount of $4,280 will become the closing balance of retained earnings as on 31st, December 2014 and opening balance of retained earnings for 2015.

_____

Step 2: Calculate the Amount of Retained Earnings at December 31, 2015

The amount of retained earnings at December 31, 2015 is calculated as below:

Amount of Retained Earnings at December 31, 2015 = Opening Balance of Retained Earnings as on 1st January 2015 + (Sales for 2015 - Cost of Goods Sold for 2015 - Operating Expenses for 2015) = 4,280 + (16,350 - 7,600 - 540) = $12,490

Answer is $12,490 (which is Option D)