The following selected accounts and account balances were taken from the records of Nowell Company. Except as otherwise indicated, all balances are as of December 31, Year 2, before the closing entries were recorded. Consulting revenue $10,100
Cash 7,600
Cash received from common stock issued during 2017 3,400
Travel expense 600
Dividends 1,300
Cash flow from investing activities 2,500
Rent expense 1,900
Payment to reduce debt principal 21,600
Retained earnings, January 1, 2018 14,300
Salary expense 3,300
Cash flow from operating activities 2,050
Common stock, December 31, 2018 11,800
Other operating expenses 1,700
1. Prepare the income statement Nowell would include in its 2018 annual report.
2. Identify the accounts that should be closed to the Retained Earnings account.
3. Determine the Retained Earnings account balance at December 31, 2018.
4. Which of the following statement(s) is true?
a. net income does not include revenue of the current year.
b. retained earnings does not include current year net income, but only the balance from previous years.
c. retained earnings not only includes current year net income, but also the balance from previous years and reductions for dividends.
d. net income only includes revenues and expenses for the current year.

Solution :

a).                              Income Statement

                     For the year ended December 31, 2018

  Revenues

  Consulting revenue                      $ 10,100

  Total revenue                                                           $ 10,100

   Expenses  

  Travel expense                             $ 600

  Rent expense                                $ 1900

  Salary expense                             $ 3300

 Some operating expenses            $ 1700

 Total expenses                                                         $ 7500

  Net Income                                                               $ 2600

b). Accounts that should be closed to the                         Reason

    retained earnings account.

  Consulting revenue                                

  The Supplies expense                         All the income and the expenses

   Travel expenses                                       accounts & the dividends account

   Dividends                                                 are closed to the retained earning  

   Rent expense                                          account.

    Salary expense

    Other operating expense          

c). The retained earnings account balance at Dec 31, year 2018 = balance at the beginning + net income - dividends

                         = 14,300 + 2,600 - 1,300

                         = $ 15,600

d).   Statements which are true                                   Reasons

  The retained earnings includes                     As evident from formula for

  the net income of the current year. It also     the retained earnings given,

  includes the balances of the previous year  the retained earning balances

 and the reduction for dividends.                    has adjustment for all these.

Net income that includes the revenues and   Net income is derived from

the expenses for the current year.                  income statement that deals

                                                                          with the income and the                    

                                                                         expenses for the current year        

                                                                          only.