[hopeful_cpa]

I thought when dividends are declared that amount is taken away from income… this question shows that it is added back. The next question I did took it away again, but here is the first question with the explanation. Any clarification on this would be great, thanks.

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The comparative balance sheets for Wellington Inc. reported the following information at December 31, 2010 and 2011:

December 31

2011

2010

Retained earnings

$210,000

$140,000

Accumulated other comprehensive income

30,000

35,000

Wellington declared cash dividends of $20,000 in 2010. The decrease in accumulated other comprehensive income for 2011 was due to unrealized losses on available-for-sale securities. For the year ended December 31, 2011, what was Wellington’s comprehensive income?

A. $65,000

B. $95,000

C. $90,000

D. $85,000 <

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ANSWER

Explanation:

Answer D is correct. Wellington’s comprehensive income for 2011 is computed as follows:

Increase in retained earnings for 2011 ($210,000 less $140,000)

$70,000

Add cash dividends declared for 2011

20,000

Net income for 2011

$90,000

Deduct the decrease in accumulated other comprehensive income for 2011 ($35,000 less $30,000)

(5,000)

Comprehensive income for 2011

$85,000

BEC: Done
REG: Done
AUD: Done
FAR: Done

I'M DONE!!!!!! AAAAAAAAAAAAAAAAAAAAAAHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[Anonymous]

I'm not 100% sure of this answer but I'll give it a shot…

Net Income rolls over into Retained Earnings with the following j/e…

dr. Income Summary

cr. Retained Earnings

Then when dividends are declared, the j/e is…

dr. Retained Earnings

cr.Dividends Payable

So the $20,000 was removed from the Retained Earnings balance in 2010 b/c of the declaration of dividends. Net Income for 2010 was really $160,000, not $140,000.

Does that make any sense?

[hopeful_cpa]

@apbandj

not really… it doesnt make sense… look at this question.

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Mirr, Inc. was incorporated on January 1, 2011, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, Mirr declared a $3,000 cash dividend, payable to stockholders on January 15, 2012. No additional activities affected owners’ equity in 2011. Mirr’s liabilities increased to $120,000 by December 31, 2011. On Mirr’s December 31, 2011 balance sheet, total assets should be reported at

A. $885,000 <—- ANSWER

B. $882,000

C. $878,000

D. $875,000

Explanation:

Answer A is correct. Mirr began operations on 1/1/11 with the following balance sheet elements:

Assets=Liabilities+Owners' equity

$860,000=$110,000+$750,000

During 2011, liabilities increased to $120,000, and owners' equity increased to $765,000 [$750,000 beginning balance + $18,000 net income ($82,000 revenues – 64,000 expenses) – $3,000 dividends declared]. Therefore, 12/31/11 assets must be $885,000.

BEC: Done
REG: Done
AUD: Done
FAR: Done

I'M DONE!!!!!! AAAAAAAAAAAAAAAAAAAAAAHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[realestatewhiz]

@hopeful.. I think apband is correct with his explanation.

We need to solve for comprehensive income.. net income +PUFE

You know that R/E increase from 12/31/10 to 12/31/11 by $70k ($210k – $140k)

We distributed $20k (day of declaration-we record) so we credit net income by $20k…$90k (NI)

Comprehensive income works unlike Net income (period) ..deduct the -5k as the $35k decreased to $30k

[realestatewhiz]

I do have trouble with the second question..but not for your reasoning.

My answer is $875k.

1.) we issue stock for $750k – Dr. Cash – $750k

2.)borrow funds of $110k – Dr. Cash – $110k

3.) Profit after dec dividend ($82k-$64k=profit – $3k dividend) – Dr. Cash – $15k

I dont know where we get the extra $10k from though.

[Anonymous]

I figured out the 2nd question. I'm not very good at explaining things so I hope you can follow…

The overall goal is to solve for Liabilities + SHE since that total = assets.

Beginning: L + SHE = 110,000 + 750,000 = 860,000

Net Income = 82,000 – 64,000 = 18,000 <—- move this over into Retained Earnings in SHE

Now you have: L + SHE = 110,000 + 768,000 = 878,000

The $3,000 cash dividend essentially has no effect on the L + SHE side because you dr. RE and cr. A/P. But, the key here is it says Liabilities increased to $120,000 by the end of the year. So that means liabilities increased by $3,000 due to the dividend declaration and by $7,000 for other unknown reasons. You are given the liabilities as of 12/31 so you don't have to solve for it.

Liabilities = $120,000 (explicitly given in problem)

SHE = $750,000 (beginning balance) + 18,000 (Retained Earnings from NI calculation) – $3,000 (Dividend declaration comes out of SHE and goes into Liabilities)

Total L+SHE = $885,000

Hope that helps!

[Author]

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