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20 February, 19:27

Packard Company engaged in the following transactions during Year 1, its first year of operations: (Assume all transactions are cash transactions.)

1) Acquired $1,050 cash from the issue of common stock.

2) Borrowed $520 from a bank.

3) Earned $750 of revenues.

4) Pald expenses of $270.

5) Pald a $70 dividend.

During Year 2, Packard engaged in the following transactions: (Assume all transactions are cash transactions.)

1) Issued an additional $425 of common stock.

2) Repaid $290 of its debt to the bank.

3) Earned revenues of $850.

4) Incurred expenses of $400.

5) Pald dividends of $120.

What is the amount of total stockholders' equity that will be reported on Packard's balance sheet at the end of Year 1?

a. $290

b. $1.460

c. $1.530

d. $980

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Answers (1)
  1. 20 February, 22:31
    0
    The correct answer is Option B.

    Explanation:

    Stockholders' equity comprises retained earnings, common stock and premium on common stock. Retained earnings are an accumulation of net income or loss over years. The effects of the transactions in Year 1 are as follows:

    1) Acquired $1,050 cash from the issue of common stock - increase common stock and cash by $1,050

    2) Borrowed $520 from a bank - this increases Cash and Liabilities by $520 - nil effect on stockholders' equity

    3) Earned $750 of revenues - this increases net income/Retained Earnings by $750

    4) Paid expenses of $270 - reduction in net income/Retained Earnings by $270

    5) Paid a $70 dividend - reduces Retained Earnings by $70

    Overall, stockholders' equity = $1,050 + $750 - $270 - $70 = $1,460
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