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shaw
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Joined: 01 Mar 2008
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Posts: 20

Posted: 06 Jul 2008 at 15:08 \| IP Logged

This question is driving me nuts. it is as follows:

Quote:

23) The following changes in Vel Corp.'s account balances occurred during 1992:

Increase
Assets $89,000
Liabilities 27,000
Capital stock 60,000
Additional paid-in capital 6,000

Except for a $13,000 dividend payment and the year's earnings, there were no changes in retained earnings for 1992. What was Vel's net income for 1992?

a. $4,000
b. $9,000
c. $13,000
d. $17,000

The answer is B, and Becker provides this explanation:

Quote:

Balance sheet changes:
Assets    89
Liabilities   27
Capital stock    60
Additional paid-in capital    6
Retained earnings (squeeze)    (4)
Total liabilities and equity   89

Retained earnings changes:
Begin R/E    0
Add net income (squeeze)   9
Less dividends paid   (13)
Ending R/E   (4)

Choice "b" is correct. $9,000 net income for 1992.

Now here's where some benevolent CPANET member can help. I don't get where in their answer they got that the beginning balance of retained earnings was $0. They did not indicate in the question that the company was just incorporated. They did not indicate that all previous year retained earnings had been distributed as a dividend, and they didn't flat out say in the fact pattern that BB R/E = $0.

So is there some kind of rule that you are supposed to assume that BB R/E from the previous year = $0 that I am missing? This may be a dumb question, but it's driving me insane! Thanks all.

__________________
B - 2/29 - 88
A - 4/14 - 85
R - 5/13 - 85
F - 7/07 - 87

only75
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Joined: 26 Feb 2008
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Posts: 24

Posted: 06 Jul 2008 at 18:26 \| IP Logged

Asset = Liab + Equity

89K = 27K + 60K + 6K - 4K

The (4K) is what Retained Earning should be.

So if you paid 13K in dividends @ the end of the year and your r/e should be (4K), YOUR NI MUST BE 9K

BEG R/E 0

NI 9K Squeeze

DIV PAID (13K)

END R/E (4K)

You have to determine what the end R/E s/b and use the variable given to you to squeeze out the NI. If there's a beg. R/E the fact patern would indicate so. Trust me I know this from first hand experience.

Good luck on your exam on Monday.

Edited by only75 on 06 Jul 2008 at 18:36

__________________
BEC - 82
REG - 83
FAR - 90
AUD - 78

shaw
Contributor

Joined: 01 Mar 2008
Online Status: Offline
Posts: 20

Posted: 06 Jul 2008 at 19:25 \| IP Logged

only75 wrote:

Asset = Liab + Equity

89K = 27K + 60K + 6K - 4K

The (4K) is what Retained Earning should be.

So if you paid 13K in dividends @ the end of the year and your r/e should be (4K), YOUR NI MUST BE 9K

BEG R/E 0

NI 9K Squeeze

DIV PAID (13K)

END R/E (4K)

Good luck on your exam on Monday.

Just so you know, you just repeated what was in the first post. I don't need help with the BASE formula. If I needed help with the BASE formula I'd still be stuck on Chapter 2. The only thing I wanted to know was regarding BB R/E. You can only squeeze when BB, EB, and some other addition or subtraction is presented, and BB wasn't presented. So I take it from your last paragraph, if BB is not presented, then just assume BB = $0. Thanks!

I hope the actual exam will be more explicit with their questions than Becker is sometimes...

__________________
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A - 4/14 - 85
R - 5/13 - 85
F - 7/07 - 87

ilcpa2008
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Joined: 20 May 2008
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Posts: 3

Posted: 07 Jul 2008 at 18:46 \| IP Logged

I see that you are taking your test today, but just in case anyone else is still looking at this....

The BB of RE is irrelevant. They don't give you ending balances in the question, they give you the changes: (4) is the change in RE from year to year. So if you want to set (4) as your ending balance for RE, you have to set the BB at zero. All that matters is that RE changed by (4) over the year (BB-EB=-4). Hope that helps!

__________________
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FAR (7/1)
REG (7/29)
BEC (8/30)

shaw
Contributor

Joined: 01 Mar 2008
Online Status: Offline
Posts: 20

Posted: 07 Jul 2008 at 18:54 \| IP Logged

ilcpa2008 wrote:

I see that you are taking your test today, but just in case anyone else is still looking at this....

Now THAT'S the answer I was looking for. Thanks!

Though you're right, it doesn't do much good now :-p

__________________
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A - 4/14 - 85
R - 5/13 - 85
F - 7/07 - 87

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