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Hello John, love your lectures. It’s been enormously helpful with my study.
I came across the following question and got very confused.
Your help would be appreciated a lot.
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The following trial balance for ABC Ltd is extracted at 31 Dec 2001.Dividends paid $28,500 (Dr)
Share Capital $20,000 (Cr)
Reserves $8,990 (Cr)Profit before tax for the year is $49,260.
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Q. ABC’s tax charge for the year is $5,000 and $10,000 is to be transferred to a non-current asset reserve. A final dividend of 5c per ordinary share is proposed.What is the retained earnings for the year?
—————————–My answer was $5,760 (=49,260-5,000-10,000-28,500) but the correct answer is $44,260 (=49,260-5,000). Aren’t you supposed to subtract dividend PAID and transfer to a reserve from profit after tax to get retained earnings for the year? Retained earnings b/f was not given in the question.
Thank you very much for your help. God bless you.
Assuming you have copied the question correctly, then it is very poorly worded.
To get the amount of this years earnings that have been retained, then they should have subtracted the dividend of 28500 to get the retained earnings.
The reason that they have not subtracted the 10,000 is that it is still being retained (even though it is in a different reserve).
The profit after tax will appear on the Statement of changes in equity, and then the divided and the transfer to the reserve will be subtracted. However, of course, the final figure for retained earnings will also include the brought forward amount.
Thank you so much for your answer John. Yes, you assumed correctly I copied the question to the letter. I can accept why they didn’t subtract 10,000 because as you explained, it hasn’t happened yet but I really don’t understand why they didn’t subtract dividend paid. In their answer section, they just say “Remember that dividens and reserves are part of the statement of changes in equity”, duh! Extremely helpful, right?
Maybe it’s just a simple mistake of theirs although it’s not shown on the errata.
Thank you again for your time. Superb as always.
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