Lexington Company engaged in the following transactions during Year 1, its first

Question

Lexington Company engaged in the following transactions during Year 1, its first year of operations. (Assume all transactions are cash transactions.) 1. Acquired $6,000 cash from issuing common stock. 2. Borrowed $4,400 from a bank. 3. Earned $6,200 of revenues. 4. Incurred $4,800 in expenses. 5. Paid dividends of $800. Lexington Company engaged in the following transactions during Year 2: 1. Acquired an additional $1,000 cash from the issue of common stock. 2. Repaid $2,600 of its debt to the bank. 3. Earned revenues, $9,000. 4. Incurred expenses of $5,500. 5. Paid dividends of $1,280. The amount of retained earnings on Lexington's balance sheet at the end of Year 1 was: Multiple Choice $6,200. $5,400. $1,400. $600.

Explanation / Answer

Lexington Company

Determination of the amount of retained earnings on Lexington’s Balance Sheet at the end of Year 1:

Revenues earned in Year 1     $6,200

Expenses incurred                  $4,800

Net Income                             $1,400

Net income transferred to retained earnings $1,400

Less: dividends paid                                       $800

Balance in retained earnings at the end of Year 1 $600

Hence, the amount of retained earnings on Lexington’s Balance Sheet at the end of Year 1 is $600

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