Question

For the year ended December 31, 2020, Transformers Inc. reported the following: Net income $300,000 Preferred dividends declared 50,000 Common dividend declared 10,000 Unrealized holding loss, net of tax 5,000 Retained earnings, beginning balance 400,000 Common stock 200,000 Accumulated Other Comprehensive Income, Beginning Balance 25,000 What would Transformers report as the ending balance of Retained Earnings? Select one: a. $695,000 b. $645,000 c. $665,000 d. $640,000

Answer 1

Solution:

The formula for calculating the ending balance of Retained Earnings is

= Beginning balance of Retained Earnings + Net Income - Preferred dividends declared - Common dividend declared

As per the information given in the question we have

Beginning balance of Retained Earnings = $ 400,000 ; Net Income = $ 300,000 ;

Preferred dividends declared = $ 50,000 ; Common dividend declared = $ 10,000

Applying the above information in the formula we have Ending balance of Retained Earnings as

= $ 400,000 + $ 300,000 - $ 50,000 - $ 10,000

= $ 640,000

Thus Transformers would report $ 640,000 as the ending balance of Retained Earnings

The solution is option d. $ 640,000