Chrystal Gems Ltd was set up with share capital of $500 000.In year 1 a loss of $50 000 was recorded,in year 2 a profit of $175 000 and in year 3 a profit of $350 000.Also in year 3 a dividend of 5% of paid up capital was paid to shareholders and $20 000 was transferred from retained earnings to a general reserve.The retained earnings balance of Chrystal Gems Ltd at the end of year 3 was:
A) $430 000
B) $475 000
C) $930 000
D) $530 000

Question

Quizplus · Accepted Answer

The retained earnings at the end of year 3 is calculated as follows: Start with the initial share capital of $500,000. Year 1 loss reduces it by $50,000, leaving $450,000. Year 2 profit adds $175,000, totaling $625,000. Year 3 profit adds $350,000, totaling $975,000. A 5% dividend on $500,000 share capital is $25,000, reducing it to $950,000. Transferring $20,000 to a general reserve leaves $930,000. However, the initial share capital is not part of retained earnings, so the correct retained earnings balance is $430,000.

Chrystal Gems Ltd Was Set Up with Share Capital of $500