Answer:
a. Retained earnings is: $11,600
as Asset = Liabilities + Owner Equity, we applying to the presented questions: Cash = Notes payable + common stock + retained earnings <=> 148,000 = 84,800 + 51,600 + retained earnings <=> retained earnings = 148,000 - 84,800 - 51,600 = 11,600
b. Begining balance:
- Asset:
Cash: $148,000
- Liabilities and owner equity:
+ Liabilities:
Notes payable $84,800
+ Owner's equity:
Common stock: 51,600
Retained earning 11,600
or in general Asset = Liabilities + Owner's Equity = 148,000
Accounting entries entered during the Year 1:
Dr Cash $28,000
Cr Revenue $28,000
Dr Expenses $16,000
Cr Cash $16,000
( to record cash income and cash expenses during the year)
Dr Retained Earnings $2,200
Cr Cash $2,200
( to record cash dividen payment)
Dr Revenue $28,000
Cr Expenses $16,000
Cr Income summary $12,000
(to record closing entry of revenue and expenses during the year by using income summary as an offset account)
Dr Income summary $12,000
Cr Retained Earning $12,000
(to close income summary account and to decide the increase in retained earning at year end)
d. The equality of accounting equation as below:
- Asset:
Cash: $157,800
- Liabilities and owner equity:
+ Liabilities:
Notes payable $84,800
+ Owner's equity:
Common stock: 51,600
Retained earning 21,400
or in general Asset = Liabilities + Owner's Equity = 157,800
Explanation:
The explanations have been given by listing down each entries need to be recorded during year 2 whose combined effect causes changes in the Balances of Items on the Balance Sheet as summarized in the answer.
The accounting method applying here is cash account, that is, incomes/expenses are recorded when they are received/paid rather than earned/incurred as the presented question hardly remind us to accrual accounting when incomes/expenses are recorded when they are earned/incurred.
