Question

"Sanchez Company engaged in the following transactions during Year 1:

1) Started the business by issuing $11,100 of common stock for cash.
2) The company paid cash to purchase $6,900 of inventory.
3) The company sold inventory that cost $4,300 for $8,400 cash.
4) Operating expenses incurred and paid during the year, $3,800.

Sanchez Company engaged in the following transactions during Year 2:

1) The company paid cash to purchase $9,400 of inventory.
2) The company sold inventory that cost $8,500 for $15,000 cash.
3) Operating expenses incurred and paid during the year, $4,800.

Note: Sanchez uses the perpetual inventory system.

Sanchez's gross margin for the Year 2 is:"

What is the amount of retained earnings that will be shown on the balance sheet at December 31, Year 2?

a) $12,500
b) $2800
c) $2100
d) $7600

Answer 1

Answer:

6,500 ; $2,000

Explanation:

The computation of the gross margin for the year 2 is shown below:

As we know that

Gross margin = Sales - cost of goods sold

= $15,000 - $8,500

= $6,500

Now for retained earning, first we have to find out the net income for both years which are shown below:

For year 1

Sales 8,400

Less: Cost of goods sold ($4,300)

Less: Operating expenses ($3,800)

Net income $300

For year 2

Sales $15,000

Less: Cost of goods sold ($8,500)

Less: Operating expenses ($4,800)

Net income $1,700

So, the retained earnings is

= $300 + $1,700

= $2,000

We simply added the net income for the year 1 and year 2 so that the retained earning could come