[vodrldnr]

Wiley Question –

51. The following changes in Vel Corp.’s account balances occurred during the current year:

Increase Assets $ 89,000
 Liabilities27,000
Capital stock 60,000
Additional paid-in capital 6,000

Except for a $13,000 dividend payment and the year’s earnings, there were no changes in retained earnings for the current year. What was Vel’s current year net income?

a.$13,000
b.$9,000
c.$4,000
d.$17,000

Answer is B…

I totally understand why answer is b ..

 

 

[vodrldnr]

I don't* totally understand why answer is b .. (sorry for typo)

especially, the problem state that ” the dividend payment ” when dividend paid there is no impact on R/E right ?

when dividend is declared we debit R/E and credit D/P …

[cpaMD86]

Dividend payments reduce retained earnings.

Assets – Liab = Stockholders Equity (APIC, Capital Stock, R/E)

89,000-27,000 = 62,000

66,000+6000 = 66,000

Change = (4000)

13,000-4000 = 9000

This is how I worked the problem…hope it helps

FAR: 9/3

[vodrldnr]

cpaMD86> why divide payment reduce R/E ????

isn't R/E reduced when dividend is declared ?????

divided declared

R/E XXXX | DIVIDNED PAYABLE XXXX

dividend payment

dividend payablmle xxxx | cash XXXX

this is my understanding about dividend payment … what part am I wrong ????

[Anonymous]

Let me put it in words so that it is clearer. The equation you want to use first is: Change in Retained Earnings = Change in Assets – Change in Liability – (Change in Capital Stocks + Change in API Stock). This totals RE change of -4,000. Then we have to switch to NI equation, which is Change in RE = NI – Dividend. If we solve that formula, it will be 9,000 NI as answer.

[vodrldnr]

Loo> thanks but what really confusing me is “dividend payment”. my textbook says that dividend reduce R/E when it is declared.

[Anonymous]

@vodrldnr, I see where you are unclear of. Yes, you are correct, Dividend increases liabilities and reduces retained earnings, but for this calculation, it should have already been included in changes in liabilities when the question said “Increases in Liabilities”. And that is why you have to add the dividend back to changes in Retained earnings in order to come out with NI. For vague questions like this one, you have to assume that dividends were declared and paid at the same period.

[vodrldnr]

@Loo, okay Now I can understand it. thank you for pointing out exactly what I was confusing. when solving problem, do we usually assume that Dividend is declared and paid at the same time ???

[Anonymous]

If it says paid, then you can assume that it was declared and paid on the same period. But if it only says declared, then it is safe to assume that it has not been paid yet.

[vodrldnr]

@Loo, thank you so much. !!!

[Author]

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