Question

Lexington Company engaged in the following transactions during Year 1, its first year in operation: (Assume all transactions are cash transactions.)

1. Acquired $4,900 cash from issuing common stock.
2. Borrowed $3,150 from a bank.
3. Earned $4,050 of revenues.
4. Incurred $2,590 in expenses.
5. Paid dividends of $590.

Lexington Company engaged in the following transactions during Year 2: (Assume all transactions are cash transactions.)

1. Acquired an additional $1,450 cash from the issue of common stock.
2. Repaid $1,965 of its debt to the bank.
3. Earned revenues, $5,450.
4. Incurred expenses of $3,130.
5. Paid dividends of $1,780.

What was the amount of liabilities on Lexington's balance sheet at the end of Year 2?

Multiple Choice

• $1,190.

• $1,450.

• ($1,965).

• $1,185.

Answer 1

Year 1: Balancesheet
Liabilities:
Common stock	$4,900
Borrowings	$3,150
Profit for the year (4,050-2,590)	$1,460
Less: Dividends paid	($590)
Total liabilities	$8,920
Assets:
Cash (4,900+4,050-2,590+3,150-590)	$8,920
Total Assets	$8,920
Year 2: Balancesheet
Common stock (4,900+1,450)	$6,350
Borrowings (3,150-1,965)	$1,185
Reserves (Opening) (1,460-590)	$870
Add: profit for the year (5,450-3,130)	$2,320
Less: Dividends paid	($1,780)
Total liabilities	$8,945
Assets:
Cash (8,920+5,450-3,130-1,780-1,965+1,450)	$8,945
Total Assets	$8,945
Liabilities = borrowings = $1,185
Ans) Option D $1,185 is correct