does anyone know how to calculate retained earnings in the beginning of the year? please explain how did u work it out.

Question

At the beginning of the financial year, the balance sheet showed assets of $1,364 and owners' equity of $836. During the year, assets increased by $74 and liabilities decreased by $38. At the end of the year, retained earnings totalled $1,700. During the year, net profit was $250 and dividends of $120 were declared and paid. Retained earnings at the beginning of the year totalled:


Select one:
a. $1,450
b. $1,830
c. $1,580
d. $1,950
e. $1,570 

Answer 1

The correct answer is option A = $1,450.

 

The problem stated that Retained Earnings at the end of the year is $1,700. The $250 net profits made during the year is already included in the ending balance of $1,700. Therefore the beginning balance of the retained earnings account is 1700-250 = 1,450USD. The dividend payment of 150 should not be deducted as dividends are declared and paid after the fact, which is closing the books and publish the financial results.

Answer 2

The amount of net income which is left in a business after distribution of dividends or owners' withdrawals is called retained earnings. 

 

The basic elements of a statement of retained earnings are:

Balance of retained earnings
Corrections for prior errors along with the related tax effect
Net income
Dividends or withdrawals by the owner(s) if any

 

When dividends are declared in a period, they must be deducted in the statement of retained earnings of that period. It does not matter whether the payment of dividend has been made or not.

 

from this information, we see that $1,700 + 250 - 120 = $1,830, option B