Q: Sanguillen Corp. showed retained earnings of $400,000 on its balance sheet la

Question

Q: Sanguillen Corp. showed retained earnings of $400,000 on its balance sheet last year. This year, the company's earnings per share (EPS) were $3.00 and its dividends paid per share (DPS) were $1.00. The company has 200,000 shares of stock outstanding. What is the level of retained earnings on the company's balance sheet this year?

A:The answer is $800,000

What I need is for someone to give me the equations needed and the steps clearly worked out. I want to learn from this, and be ready to do problems like it.

Explanation / Answer

EPS = $3, but $1 per share is paid out as dividends. This means that $2 per share is added to retained earnings. Total amount retained is $2(200,000) = $400,000. Add this to the amount already in the retained earnings account on the balance sheet and you get a total ending balance of retained earnings equal to $400,000 + $400,000 = $800,000.

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