The Correct Answer and Explanation is:
The correct answer is $100,000.
Here is an explanation of how to arrive at this answer.
The Retained Earnings account is a component of stockholders’ equity that represents the cumulative net income of a corporation that has been retained for reinvestment in the business, rather than being distributed to shareholders as dividends. The calculation for the ending balance in Retained Earnings is a straightforward formula:
Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividends
To solve this problem, we must identify the relevant figures from the information provided and apply them to this formula.
First, we determine the beginning balance. The problem states that Clothing Emporium was organized on January 1, 2024. Since this is the company’s first year of operations, it starts with a beginning Retained Earnings balance of $0.
Next, we identify the items that affect the Retained Earnings account during 2024. According to the formula, we need the net income and any dividends paid. The problem provides these two figures directly:
- Transaction 3: Reported a net income of $200,000. Net income increases Retained Earnings.
- Transaction 4: Paid dividends of $100,000. Dividends decrease Retained Earnings.
It is important to note that the other transactions listed do not affect the Retained Earnings account. The issuance of common stock (Transactions 1 and 2) affects other equity accounts, specifically Common Stock and Additional Paid in Capital. These are contributions of capital from owners, not earnings generated by the company’s operations. Therefore, the information about the number of shares issued, the issue price per share, the par value, and the number of authorized shares is not relevant for calculating the ending Retained Earnings balance.
Now, we can plug the values into the formula:
Ending Retained Earnings = $0 (Beginning Balance) + $200,000 (Net Income) – $100,000 (Dividends)
Ending Retained Earnings = $100,000
Thus, the ending balance in the Retained Earnings account for Clothing Emporium at the end of 2024 is $100,000.
