Question

The net income of Harriet, Inc. for the year is $35,000. The dividends declared during the year were $42,000. Which of the following statements is true?

A. Retained Earnings account increases by $35,000.
B. Retained Earnings increase by $7,000.
C. Retained Earnings account decreases by $42,000.
D. Retained Earnings account decreases by $8,000.
E. None of the above

Answer 1

The true statement is:

Retained Earnings account decreases by $42,000.Thus the correct option is C.

Step-by-step explanation:

The correct statement is C. Retained Earnings account decreases by $42,000. When a company declares dividends, it signifies the distribution of profits to its shareholders. In this case, the net income of $35,000 is not sufficient to cover the declared dividends of $42,000. Therefore, the excess dividend amount is subtracted from the Retained Earnings account.

Retained Earnings represent the cumulative net income of a company that has not been distributed as dividends. If dividends declared exceed the net income, it results in a reduction of the Retained Earnings account. The calculation is as follows:

`\[ \text{Retained Earnings decrease} = \text{Dividends declared} - \text{Net Income} \]`

`\[ \text{Retained Earnings decrease} = \$42,000 - \$35,000 = \$7,000 \]`

Thus, the Retained Earnings account decreases by $7,000. This is reflected in option C, making it the correct answer.Thus the correct option is C.