Q23E - Horngren'S Financial And Managerial Accounting

Question

McGregor Insurance Agency started the year with a beginning Retained Earnings balance of \(27,500. During the year, McGregor Insurance Agency earned \)34,000 of Service Revenue and incurred \(23,500 of various expenses. Dividends of \)12,000 from the business were paid to stockholders. After the closing entries are recorded and posted, what will be the balance of Retained Earnings?

Step-by-Step Solution

Answer

Ending balance of retained earnings equals to $26,000

Step 1: Calculation of net income

Net income is calculated as follows

$\begin{array}{rcl}\mathbf{NetIncome}& \mathbf{=}& \mathbf{TotalRevenues}-\mathbf{TotalExpenses}\\ & \mathbf{=}& \mathbf{\$}\mathbf{34}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{23}\mathbf{,}\mathbf{500}\\ & \mathbf{=}& \mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{500}\end{array}$

Step 2: Calculation of ending balance of retained earnings

Ending balance of retained earnings is calculated as follows: 

$\begin{array}{rcl}\mathbf{EndingBalance}& \mathbf{=}& \mathbf{BeginningBalance}+\mathbf{NetIncome}-\mathbf{Dividends}\\ & \mathbf{=}& \mathbf{\$}\mathbf{27}\mathbf{,}\mathbf{500}+\mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{500}-\mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{26}\mathbf{,}\mathbf{000}\end{array}$