Question

In its first three years of operations, a company... In its first three years of operations, a company has net income of $2,000; $5,000; and $8,000. It also pays dividends of $1,000 in the second year, and $3,000 in the third year. What is the balance of Retained Earnings at the end of the third year?

Multiple Choice
A. $5,000.
B. $11,000.
C. $4,000.
D. $15,000.

Answer 1

The balance of Retained Earnings at the end of the third year is $11,000.

Step-by-step explanation:

Retained Earnings is a component of the Shareholders' Equity section of a company's balance sheet. It represents the cumulative net income that has been retained and not distributed to shareholders as dividends.

To calculate the balance of Retained Earnings at the end of the third year, we need to start with the beginning Retained Earnings and add the net income for each year, and then subtract the dividends paid for each year.

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

In this case, the beginning Retained Earnings is $0 because it is the first three years of operations. So the calculation is as follows:

Ending Retained Earnings = $0 + $2,000 + $5,000 + $8,000 - $1,000 - $3,000 = $11,000.

Therefore, the balance of Retained Earnings at the end of the third year is $11,000.