Question

The net income of Hendley, Inc. for the year is $40,000. The dividends declared during the year were $51,000. Which of the following statements is true?

A. Retained Earnings account decreases by $11,000.
B. Retained Earnings account decreases by $40,000.
C. Retained Earnings will remain the same.
D. Retained Earnings account increases by $51,000.

Answer 1

The correct statement is that the Retained Earnings account decreases by $11,000, calculated by subtracting the dividends of $51,000 from the net income of $40,000.

Step-by-step explanation:

The student asked which statement is correct if Hendley, Inc. has a net income of $40,000 and declared dividends of $51,000 during the year. To determine the effect on the Retained Earnings account, we must understand that net income increases Retained Earnings, while dividends decrease it. Since the dividends exceed the net income, Retained Earnings will decrease by the difference.

Net Income: +$40,000 (increases Retained Earnings)
Dividends: -$51,000 (decreases Retained Earnings)
The net effect is a decrease in Retained Earnings of $11,000, making option A correct.

Retained Earnings account decreases by $11,000.

Answer 2

The Retained Earnings account will decrease by $11,000. The Retained Earnings account of Hendley, Inc. decreases by $11,000, calculated by subtracting the dividends declared from the net income.

Step-by-step explanation:

Retained Earnings account is a component of the shareholders' equity section of the balance sheet. It represents the cumulative amount of net income kept in the company for future use.

In this case, the net income of Hendley, Inc. is $40,000. However, the dividends declared during the year were $51,000, which is greater than the net income. Since dividends are paid out of retained earnings, the Retained Earnings account will decrease by the difference between the net income and dividends, which is $51,000 - $40,000 = $11,000.

Therefore, the correct statement is A. Retained Earnings account decreases by $11,000.

Retained earnings are the amount of profit a company has left over after paying all its direct costs, indirect costs, income taxes and its dividends to shareholders.