Question

Perez Corporation has 100,000 shares of $1 par value common stock and 20,000 shares of 8% cumulative preferred stock, $100 par value, outstanding. The balance in Retained Earnings at the beginning of the year was $1,600,000, and one year's dividends were in arrears. Net income for the current year was $870,000.

If Perez Corporation paid a dividend of $2 per share on its common stock, what is the balance in Retained Earnings at the end of the year?

a. $2,150,000.

b. $2,270,000.

c. $2,110,000.

d. $1,950,000.

Answer 1

D. $1,950,000

Step-by-step explanation:

Answer 2

Option D is correct,$1,950,000

Step-by-step explanation:

In order to compute the closing balance of retained earnings, the preferred shares dividends for prior and current years as well as the common stock dividend must be deducted from net income before adding the remnant to the opening retained earnings:

Net income $870,000

Preferred dividend prior year($100*20000*8%) ($160,000)

Preferred dividend current year($100*20000*8%) ($160,000)

Common stock dividend($2*100,000) ($200,000)

net income after dividends $350,000

Closing retained earnings=$1600,000+$350,000

=$1,950,000