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.

        I.            Issued new shares worth $200,000

      II.            Sold a piece of machinery with a book value for $150,000 for $50,000

    III.            Wrote-off non-collectible receivables worth $30,000

    IV.            The company office building was appraised at $750,000 above its book value

      V.            Settled a long-standing product liability lawsuit with a customer for $80,000

($210,000)

$2,665,000

$2,515,000

($235,000)

        I.            Issued new shares worth $200,000

      II.            Sold a piece of machinery with a book value for $150,000 for $50,000

    III.            Wrote-off non-collectible receivables worth $30,000

    IV.            The company office building was appraised at $750,000 above its book value

      V.            Settled a long-standing product liability lawsuit with a customer for $80,000

Explanation / Answer

There are three transactions impacting the retained earnings.
1. Selling piece of machinery for $50,000, which has a book value of $150,000. This will result in a loss of $100,000.
2. Writing-off non-collectible receivables of $30,000 again resulting in a loss of $30,000.
3. Settling a long-standing product liability lawsuit with a customer for $80,000. This amount will be paid using retained earnings and will have a negative value.

Net effect on Retained Earnings = -$100,000 -$30,000 -$80,000 = -$210,000 or ($210,000)

So, Option A is correct.

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