Question

A firm reports net income of $500,000 for 2011. The most recent balance sheet for the reports retained earnings of $2,000,000. The firm will pay out 25% of net income as dividends. What will the new balance be for retained earnings

Answer 1

Answer:

$2,375,000

Explanation:

Retained Earning is the accumulated balance of all the prior year's income / losses after paying all the dividend. This balance can be used for the dividend payment or reinvestment in the business.

Balance of Retained Earning = $500,000

Dividend Payment = 25% x $500,000 = $125,000

Additions to Retained Earning = $500,000 - $125,000 = $375,000

New balance of Retained Earning = $2,000,000 + $375,000 = $2,375,000