Question

Sultan Inc. was organized on January 1, 2020. It reported the following for its first two years of operations:
Net earnings for 2020 $ 31,000
Dividends for 2020 14,200
Total shareholders’ equity at end of 2020 130,000
Net earnings for 2021 42,000
Dividends for 2021 18,700
Total shareholders’ equity at end of 2021 250,000
Required:
Compute the ending balance of retained earnings for Sultan Inc. as at December 31, 2021.

Answer 1

The ending balance of retained earnings for Sultan Inc. as at December 31, 2021 is $40,100

What is the retained earnings at the end of 2020?

The retained earnings at the end of 2020 is the net earnings for 2020 minus the dividends paid in 2020 , in other words, the 2020 ending balance of retained earnings are computed as shown  below:

retained earnings for 2020=$31,000-$14,200

retained earnings for 2020=$16,800

However, we need to determine additional retained earnings in 2021 which is also ascertained as net earnings minus dividends paid

additional retained earnings in 2021=$42,000-$18,700

additional retained earnings in 2021=$23,300

the ending balance of retained earnings for Sultan Inc. as at December 31, 2021=2021 balance of retained earnings+ additional retained earnings in 2021

the ending balance of retained earnings for Sultan Inc. as at December 31, 2021=$16,800+$23,300

the ending balance of retained earnings for Sultan Inc. as at December 31, 2021=$40,100

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