BACHELOR OF BUSINESS ADMINISTRATION

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BUSINESS ADMINISTRATION

FINANCIAL ACCOUNTING

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
On January 1, 2020, Anson Company started the year with a $300, 000 credit balance in Retained Earnings, a $50, 000 balance in Common Stock, and a $300, 000 balance in Additional Paid-in Capital. During 2020, the company earned net income of $45, 000, declared a dividend of $15, 000, and issued 900 additional shared of stock (par value of $1 per share) for $10, 000. What is total stockholders’ equity on December 31, 2020?
A
$692, 500
B
$695, 000
C
$690, 000
D
None of the above
Explanation: 

Detailed explanation-1: -When dividends are declared by a corporation’s board of directors, a journal entry is made on the declaration date to debit Retained Earnings and credit the current liability Dividends Payable. It is the declaration of cash dividends that reduces Retained Earnings.

Detailed explanation-2: -What is the effect of the December 31 adjusting entry to record $400 of revenues earned but not yet collected? The accounts receivable balance should be increased by $400 and the sales revenue account should be increased by $400.

Detailed explanation-3: -The normal balance in the retained earnings account is a credit. This balance signifies that a business has generated an aggregate profit over its life. However, the amount of the retained earnings balance could be relatively low even for a financially healthy company, since dividends are paid out from this account.

Detailed explanation-4: -While you can use retained earnings to buy assets, they aren’t an asset. Retained earnings are actually considered a liability to a company because they are a sum of money set aside to pay stockholders in the event of a sale or buyout of the business.

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