Rick and Joe get together and start a mortgage brokerage business. They each contribute $25,000 of capital to the business. After the first year of operation, the total owners' equity is listed as $60,000. Most likely, the additional $10,000 of owners' equity is
A) common stock.
B) long-term liabilities.
C) current liabilities.
D) retained earnings.
E) a bank loan.

Question

Quizplus · Accepted Answer

Retained earnings represent the profits that are kept by the business after all expenses and dividends have been paid. In this case, the additional $10,000 of owners' equity is most likely to be retained earnings because it is unlikely to be common stock (as this would require issuing new shares), long-term liabilities (which would be recorded separately), current liabilities (which represent amounts owed to creditors), or a bank loan (which would be recorded as a liability).

Rick and Joe Get Together and Start a Mortgage Brokerage