Q 3.610: Two firms have the same retained earnings on the first day of May and t

ID: 2501372 • Letter: Q

Question

Q 3.610: Two firms have the same retained earnings on the first day of May and the same net income over the course of the month. However, Firm A's adjusted trial balance for May shows dividends of $5,000, while Firm B's shows dividends of $4,000. Given this information, A) Firm A will have higher retained earnings as of May 31st. B we cannot make any conclusions about either firm's retained earnings as of May 31st. C) Firm A and Firm B will have equal retained earnings as of May 31St. Firm B will have higher retained earnings as of May 315t Firm B will have higher retained earnings as of May 31st.

Explanation / Answer

We are given that both firms have Same beginning balance of retained earnings as on May 1st and same Net income

Lets Assume Beginning balance of retained earnings on May 1st is $100000 and Net income for May month is $50000

We can calculated ending balance of retained earnings as on May 31 as under:

Firm A

Firm B

Retained earnings balance as on May 1st

$ 100,000

Add: Net income for May month

$ 50,000

Less: Dividend

$ (5,000)

$ (4,000)

Retained earnings balance as on May 31st

$ 145,000

$ 146,000

Hence we can see that Firm B shall have higher retained earnings balance as on May 31st because it has lower dividends