Question

ABC had the following net income (loss) the first three years of operation: $7,100, ($1,600), and $3,600. If the Retained Earnings balance at the end of year three is $1,100, what was the total amount of dividends paid over these three years?

Answer 1

Answer:

The total amount of dividends paid over these three years: $8000

Explanation:

• Net income (loss) in three years

$7,100, ($1,600), and $3,600  

=> the total net income is the first three years of operation is:

$7,100 -  ($1,600) +  $3,600  

= $9,100

This money is not kept in the Retained Earnings because it is used for dividend payment. But Earnings balance at the end of year three is $1,100, so the total amount of dividends paid over these three years:

= Total net incomes - Retained Earnings

= $9,100 - $1,100,  

= $8000

Hope it will find you well.

Answer 2

Answer:

Total amount of dividends paid over these three years is equal to the values of accumulated net income or losses less the balance of Retained Earnings.

This value is $7,400 (7,100+3,000-1,600) - 1,100.

Explanation:

Retained Earnings are the total amounts from net income or loss that are not distributed to stockholders.  They are usually re-invested in the company to earn more income.

The allocation of surplus income between retained earnings and dividends is one of the decisions that a company makes to balance stockholders' expectation for immediate returns and long-term growth of their investments.  It is a very delicate decision that must be taken to meet the varying expectations of stockholders.