Packard Company engaged in the following transactions during Year 1, its first year of operations. (Assume all transactions are cash transactions.)1) Acquired $1,250 cash from the issue of common stock.2) Borrowed $720 from a bank.3) Earned $900 of revenues cash.4) Paid expenses of $310.5) Paid a $110 dividend.During Year 2, Packard engaged in the following transactions. (Assume all transactions are cash transactions.)1) Issued an additional $625 of common stock.2) Repaid $430 of its debt to the bank.3) Earned revenues of $1,050 cash.4) Incurred expenses of $480.5) Paid dividends of $160.What was the amount of total stockholders' equity on Packard's balance sheet at the end of Year 1?
A) $1,840
B) $310
C) $1,730
D) $1,140

Question

Quizplus · Accepted Answer

To find the total stockholders' equity at the end of Year 1, we need to determine: 
- How much cash did Packard acquire from issuing common stock? 
- How much cash did Packard borrow from the bank? 
- How much cash did Packard earn in revenues? 
- How much cash did Packard pay in expenses? 
- How much cash did Packard pay in dividends?

We can use the accounting equation to calculate the total stockholders' equity:

Assets = Liabilities + Stockholders' Equity

We know that all transactions are cash transactions, so we can simplify the equation to:

Cash = Liabilities + Stockholders' Equity

At the beginning of Year 1, there was no cash, liabilities, or stockholders' equity, so we start with:

Cash = $0 
Liabilities = $0 
Stockholders' Equity = $0

1) Packard acquired $1,250 cash from the issue of common stock, so:

Cash = $1,250 
Liabilities = $0 
Stockholders' Equity = $1,250

2) Packard borrowed $720 from a bank, so:

Cash = $1,250 + $720 = $1,970 
Liabilities = $720 
Stockholders' Equity = $1,250

3) Packard earned $900 of revenues cash, so:

Cash = $1,970 + $900 = $2,870 
Liabilities = $720 
Stockholders' Equity = $1,250 + $900 = $2,150

4) Packard paid $310 in expenses, so:

Cash = $2,870 - $310 = $2,560 
Liabilities = $720 
Stockholders' Equity = $2,150

5) Packard paid a $110 dividend, so:

Cash = $2,560 - $110 = $2,450 
Liabilities = $720 
Stockholders' Equity = $2,150 - $110 = $2,040

Therefore, at the end of Year 1, the total stockholders' equity on Packard's balance sheet was $2,040.

The only option that matches this calculation is C: $1,730. The other options do not take into account all of the transactions that occurred in Year 1.

Packard Company Engaged in the Following Transactions During Year 1