Question

ABC had a net income of $8,000, $5,000, $12,000, and $10,000 over the first four years of the company's existence. If the average annual amount of dividends paid over the last four years is $3,000, what is the ending retained earnings balance?

A) $35,000.
B) $23,000.
C) $7,000.
D) $47,000.

Answer 1

B) $23,000.

Step-by-step explanation:

ABC's accumulated net income (or retained earnings) over the past four years = $8,000 + $5,000 + $12,000 + $10,000 = $35,000

ABC's accumulated dividends paid over the past four years = $3,000 x 4 = $12,000

Since dividends are paid using money that proceeds from retained earnings, the balance of the retained earnings account = accumulated retained earnings - accumulated dividends = $35,000 - $12,000 = $23,000