Question

Net Income, Dividends, and Retained Earnings $300 $250 110 $200 $150 90 90 $100 150 120 $50 100 80 80 80 20 30 40 $0 NI Div RE NI Div RE NI Div RE Year 1 Year 2 Year 3

Answer 1

1. Retained earnings at the end of year 1= $80

2a. lAt the end of year 2 the company reports net income of $120. It includes dividend declared for that year amounting to $30.

2b. During the year 2, company declared dividend amounting to $30.

2c. Retained earnings at the end of the year 2 =

Net income after dividend transferred to retained earnings in year 2 + Net income after dividend transferred to reatined earnings in year 1

= 90+80

=170

2d. It includes net income after dividend during the years 1 and 2 ( i.e 80+90)

3a. Net income for the year 3 = $150

3b. Dividend declared in year 3 = $40

3c. The ending balance of retained earnings at the end of year 3 =

sum of net income after dividend during the years 1,2 and 3

=80+90+110

=280

3d. The ending balance of retained earnings at the end of year 3 includes the net income after dividend during the years 1,2 and 3.