Question

The Toy Store has beginning retained earnings of $318,423. For the year, the company earned net income of $11,318 and paid dividends of $7,500. The company also issued $25,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

Answer 1

Answer: $322 241

Explanation: Retained earnings is the capital that is left over after total dividends has been deducted and paid out. It is calculated as follows:

Retained earnings = retained earnings at the beginning of the year + net profits made during the current year - dividends paid out.

∴ Retained earnings = $318, 423 (opening Retained earnings)+ $11,318 (net profits / income) - $7,500 (dividends)

=$322,241

The $25,000 new stock issued generated income to the business, but this does not fall in the retained earnings line item. Rather it falls under the Ordinary Share Capital line item, which includes all the company's issued share capital.