Question

The Retained earnings account for Nathan Corporation had a credit balance of $800,000 at the end of 2016. Selected transactions during 2017 follow:
a. Net income was $130,000.
b. Cash dividends declared were $60,000
c. Repurchased 100 shares of Nathan Corporation common stock, paying S20 per share. Each share has a $5 par value and was originally issued for $35.
d. Sold 20 shares of Nathan Corporation common stock for $22 each.

Required:
Calculate Nathan's retained earnings balance as of the end of 2011. How large of a dividend could Nathan have declared in 2011?

Answer 1

Answer:

1 & 2. $870,000

Explanation:

1. Retained Earnings is an equity account from which dividends are paid. The Net Income is added to this and the dividends are deducted from this.

Retained Earnings for the year = Beginning balance + Net Income - Dividends

= 800,000 + 130,000 - 60,000

= $870,000

2. Nathan Corporation could have declared the entire retained earnings of $870,000. This is however, not a recommended action because the Retained Earnings maintain a cushion for the company and as such contribute to financial health and structure of the company.