Chapter 2: 27BP-b (page 53)

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:
Current assets
Liabilities
Cash
$15,000
Accounts payable
$17,000
Accounts receivable
20,000
Notes payable
25,000
Inventory
30,000
Bonds payable
55,000
Prepaid expenses
12,500
Fixed assets
Stockholder’s equity
Plant and equipment (gross)
Less: accumulated depreciation
$255,000
51,000
Preferred stock
$25,000
Net plant and equipment
$204,000
Common stock
60,000
Paid in capital
30,000
Retained earnings
69,500
Total assets
$281,500
Total liabilities and stockholder’s equity
$281,500
Sales for 20X2 were $245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.
$2,500 in preferred stock dividends were paid, and $5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.
During 20X2, the cash balance and prepaid expenses balances were
unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of $40,000. Accounts payable increased by 20 percent. Notes payable increased by $6,500 and bonds payable decreased by $12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.
b. Prepare a statement of retained earnings for 20X2.

Expert verified

Retained earnings are $96,700.

Step by step solution

Retained earnings are the portion of net income which the company retains for further investments and growth projects.

Particulars	Amount ($)
Retained earnings January 1 20X2	69,500
Add: Earnings available to common stockholders 20X2	32,700
Less: Cash dividends declared	5,500
Retained earnings December 31 20X2	96,700

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Selling and administrative expenses	$112,000
Depreciation expenses	73,000
Sales	489,000
Interest expenses	45,000
Cost of goods sold	156,000
Taxes	47,000

Current assets		Liabilities
Cash	\(15,000	Accounts payable	\)17,000
Accounts receivable	20,000	Notes payable	25,000
Inventory	30,000	Bonds payable	55,000
Prepaid expenses	12,500

Fixed assets		Stockholder’s equity
Plant and equipment (gross) Less: accumulated depreciation	\(255,000 51,000	Preferred stock	\)25,000
Net plant and equipment	\(204,000	Common stock	60,000
		Paid in capital	30,000
		Retained earnings	69,500
Total assets	\)281,500	Total liabilities and stockholder’s equity	\(281,500