Chapter 1, Problem 4E

Completing a Balance Sheet and Inferring Net Income

Ken Young and Kim Sherwood organized Reader Direct as a corporation; each contributed $49,000 cash to start the business and received 4,000 shares of stock. The store completed its first year of operations on December 31, 2017. On that date, the following financial items for the year were determined: cash on hand and in the bank, $47,500; amounts due from customers from sales of books, $26,900; equipment, $48,000; amounts owed to publishers for books purchased, $8,000; one-year notes payable to a local bank for $2,850. No dividends were declared or paid to the stockholders during the year.

Required:

1. 1. Complete the following balance sheet at December 31, 2017.

1. 2. Using the retained earnings equation and an opening balance of $0, work backwards to compute the amount of net income for the year ended December 31, 2017.
2. 3. As of December 31, 2017, did most of the financing for assets come from creditors or stockholders?
3. 4. Assuming that Reader Direct generates net income of $3,000 and pays dividends of $2,000 in 2018, what would be the ending Retained Earnings balance at December 31, 2018?