Check my wor Love Company\'s accounting records show an after-closing balance of
ID: 2338938 • Letter: C
Question
Check my wor Love Company's accounting records show an after-closing balance of $20,100 In its Retained Earnings account on December 31, Year 2. During the Year 2 accounting cycle, Love eamed $16,500 of revenue, incurred $9,900 of expense, and paid $2.200 of dividends Revenues and expenses were recognized evenly throughout the accounting period. Required a. Determine the balance in the Retained Earnings account as of January 1, Year 3. b. Determine the balance in the temporary accounts as of January 1, Year 2. d Earnings account as of December 31, Year 1. d. Determine the balance in the Retained Earnings account as of June 30, Year 2. a. Balance in the retained earnings, January 1, Year 3 b. Balance in the temporary accounts, January 1, Year 2 c. Closing retained earnings, December 31, Year 1 d. Balance in the retained earmings, June 30, Year 2Explanation / Answer
a. Balance in the retained earnings, January 1, Year 3 = $20,100
Explanation
It is given in the question that the retained earnings balance on Dec. 31, Year 2 [i.e. Ending retained earnings balance] is $20,100
Ending retained earnings balance of Year 2 = Beginning retained earnings balance of Year 3
Therefore,
Beginning retained earnings balance of Year 3 = $20,100
b. Balance in the temporary accounts, January 1, Year 2 = Nil
Explanation
Temporary accounts are the accounts that form part of income statement. In other words, all accounts in the income statement are temporary accounts.
Temporary accounts - revenue accounts, expenses accounts, gain accounts, loss accounts
Temporary accounts related to a year will be closed in the same year itself at the year-end after the preparation of financial statements. Therefore temporary accounts shows nil balance on the first day of the immediate succeeding year.
Closing an account means transferring the balances to other accounts (in this case- to the balance sheet accounts).
Since all the temporary accounts related to the Year 1 would have been closed in the year 1 itself at the year-end i.e. December 31, year 1, temporary accounts shows nil balance on the immediate next day i.e. January 1, Year 2.
c. Calculation of retained earnings balance, December 31, Year 1
We have:
Ending retained earnings balance [December 31, year 2] = $20,100
Net income for Year 2 = Revenue - Expenses = $16,500 - $9,900 = $6,600
Dividends paid for the year 2 = $2,200
Formula
**Ending retained earnings balance [Dec. 31, Year 2] =
Beginning retained earnings balance [Jan. 1, year 2] + Net income - Dividends
From the above formula we can derive the following formula:
**Beginning retained earnings balance [Jan. 1, year 2] =
Ending retained earnings balance [Dec. 31, Year 2] - Net income + Dividends
**Beginning retained earnings balance [Jan. 1, year 2] = $20,100 - $6,600 + $2,200
Beginning retained earnings balance [Jan. 1, year 2] = $15,700
Retained earnings balance [Jan. 1, year 2] = Ending retained earnings balance [Dec. 31, year 1]
Therefore, Ending retained earnings balance [Dec. 31, year 1] = $15,700
d. Calculation of retained earnings balance, June 30, Year 2
It is given that that the revenues and the expenses were recognized evenly throughout the accounting period.
Since we have to calculate the retained earnings balance as of June 30, Year 2, we shall take revenues earned, expenses incurred only up to 6 months [January 1 to June 30]
Beginning retained earnings balance [Calculated in point c] = $15,700
Revenues earned upto June 30, Year 2 = $16,500 ÷ 2 = $8,250
Expenses incurred upto June 30, Year 2 = $9,900 ÷ 2 = $4,950
Net income = Revenue – Expenses = $8,250 - $4,950 = $3,300
**Retained earnings balance [June 30, Year 2] =
Beginning retained earnings balance [Jan. 1, year 2] + Net income – Dividends
**Retained earnings balance [June 30, Year 2] = $15,700 + $3,300 - $0 = $19,000
Therefore, Retained earnings balance [June 30, Year 2] = $19,000
Note 1: It is assumed that the dividend has been at the year end. That is why it is not considered while calculating retained earnings balance [June 30, Year 2].
Note 2: If you are getting a wrong answer, make sure you take the dividend into consideration. If you take dividend into consideration, then dividend would be $1,100.