What is the net effect on retained earnings of your firm of the following transa

Question

What is the net effect on retained earnings of your firm of the following transactions made by your firm during the current year? Ignore any aspect not mentioned here, for example, taxes.              

Bought marketable securities with cash worth:   $75,000

Appraisal for land came out above current book value by               $110,000

Bought new piece of machinery with cash worth                $150,000

Retired loan with cash payment of           $80,000

Issued new shares at par worth $250,000

($55,000) $0 $55,000 $250,000

Explanation / Answer

Retained earnings = $0

There will be no effect on retained earnings because of the following reasons:

Bought securities with cash worth $75,000 = this will increase investments and decrease cash, causing no effect on retained earnings.

Appraisal value of $110,000 has no effect on accounting equation.

Machinery of $150,000 purchased through cash = this will increase machinery and decrease cash, causing no effect on retained earnings.

Retiring loan of $80,000 decreases loan liability and cash, causing no effect on retained earnings.

New issue of $250,000 increases cash and common stock, causing no effect on retained earnings.

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