Warren Enterprises had the following events during 2016:
The business issued $40,000 of common stock to its stockholders.
The business purchased land for $24,000 cash.
Services were provided to customers for $32,000 cash.
Services were provided to customers for $10,000 on account.
The company borrowed $32,000 from the bank.
Operating expenses of $24,000 were incurred and paid in cash.
Salary expense of $1,600 was accrued.
A dividend of $8,000 was paid to the stockholders of Warren Enterprises.
Assuming the company began operations during 2016,the amount of retained earnings as of December 31,2016 would be:
A)$10,000
B)$8,400
C)$16,400
D)$42,000

Question

Quizplus · Accepted Answer

The calculation of retained earnings can be done as follows:
Retained earnings = (Beginning retained earnings + Net income for the year - Dividends paid)
Since the company began operations during 2016, the beginning retained earnings would be $0.
Net income for the year can be calculated as follows:
Revenue from services provided = $32,000 (cash) + $10,000 (on account) = $42,000
Operating expenses = $24,000
Salary expense = $1,600 (accrued)
Net income = $42,000 - $24,000 - $1,600 = $16,400
Dividends paid = $8,000
Retained earnings = ($0 + $16,400 - $8,000) = $8,400
Therefore, the amount of retained earnings as of December 31, 2016 would be $8,400, which is option B.

Warren Enterprises Had the Following Events During 2016