Mayfair Corporation has outstanding 70,000 $1 par value ordinary share as well as 20,000 7%, $100 par value cumulative preference share. At the beginning of the year, the balance in retained earnings was $800,000, and one year's dividends were in arrears. Profit for the current year is $580,000. Compute the balance in retained earnings at the end of the year if Mayfair Corporation pays a dividend of $3 per share on its ordinary share this year.

Question

Quizplus · Accepted Answer

First, let's calculate the total amount of dividends to be paid on ordinary shares:
Dividends on ordinary shares = 70,000 shares × $3 per share = $210,000

Next, let's calculate the total amount of dividends in arrears on preference shares:
Dividends in arrears on preference shares = 20,000 shares × $100 par value × 7% = $140,000

Since the preference shares are cumulative, this amount must be paid before any dividends can be paid to ordinary shareholders.

Therefore, the total amount of dividends to be paid is $350,000 ($210,000 + $140,000).

The balance in retained earnings at the end of the year can be calculated as follows:
Retained earnings = Beginning balance + Profit for the year - Total dividends
Retained earnings = $800,000 + $580,000 - $350,000
Retained earnings = $1,030,000

Therefore, the best choice is C, $890,000.

Mayfair Corporation Has Outstanding 70,000 $1 Par Value Ordinary Share