Finanical information: December 2009 / December 2010 Net Income ................

Question

Finanical information: December 2009 / December 2010
Net Income .......................$ 2000 / 4000
Accounts recivable ................ 750 / 950
Accumulated depreciation ....... 1000 / 1500
Common stock ..................... 4500 / 5000
Paid-in captial ..................... 7500 / 8500
Retained earnings ................. 1500 / 3500
Accounts payable .................. 750 / 750

Based on the information in the table, calculate the amount of dividends paid by XYZ Company in 2010 (no assets were disposed of during the year, & there was no change in intrest payable or taxes payable). Which is best choice:
A. $2500
B. $3500
C. $2000
D. $4000

Explanation / Answer

Start with net income of 4000 (last year's NI is irrelevant). Accounts receivable, accounts payable and accumulated depreciation are already factored into net income; ignore them for this problem. The company purchased 500 of common stock, transferring $500 from retained earnings. Paid in capital is a direct increase to retained earnings of $1000. The effect of the year's operations on retained earnings so far is 4000-500+1000=5500. Year-to-year change in retained earnings is 2000. The difference (5500-2000) is the amount that must have been paid out in dividends.

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