A company earned net income of $ 80 comma 000 during the year ended December 31, 2016. On December 15, the company declared the regular dividend on its 2 % preferred stock (13 comma 000 shares with total par value of $ 130 comma 000 ) and a $ 0.75 per share dividend on its common stock (65 comma 000 shares with total par value of $ 650 comma 000 ). The company paid the dividends on January 4, 2017. Did Retained Earnings increase or decrease during 2016 ? By how much?

Question

Amira Martin

Business

12 January, 10:27

A company earned net income of $ 80 comma 000 during the year ended December 31, 2016. On December 15, the company declared the regular dividend on its 2 % preferred stock (13 comma 000 shares with total par value of $ 130 comma 000 ) and a $ 0.75 per share dividend on its common stock (65 comma 000 shares with total par value of $ 650 comma 000 ). The company paid the dividends on January 4, 2017. Did Retained Earnings increase or decrease during 2016 ? By how much?

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Darwin Montoya · Answer 1

Retained Earnings increased $28,650 in 2016.

Explanation:

The total increase in Retained Earnings account = Net income = $80,000;

The total decrease in Retained Earnings account = Dividend paid to common shares + Dividend paid to preferred shares = Dividend per common share x Number of common share outstanding + % dividend on preferred stock x par value of preferred stock x number of preferred stock outstanding = 0.75 x 65,000 + 2% x (130,000 / 13,000) x 13,000 = $51,350;

So, Net effect on Retained Earnings Account = $80,000 - $51,350 = $28,650 (increase).