Lewis Corporation reported the following information for the year ended December 31,2017:
$\begin{array}{lr}
\text { Net income } & \$ 10,000 \
\text { Dividends } & 6,000 \
\text { Retained eamings at December } 31,2017 & 25,000
\end{array}$
What was the economic effect of the payment of Lewis's dividends?
A)The dividends reduced net income for 2017.
B)The dividends should be equal to net income if the company's accounting equation is in balance.
C)The dividends reduced total retained earnings for the year.
D)The dividends must be paid whenever Lewis Corporation reports net income.

Question

Lewis Corporation reported the following information for the year ended December 31,2017:  
$\begin{array}{lr}
\text { Net income } & \$ 10,000 \
\text { Dividends } & 6,000 \
\text { Retained eamings at December } 31,2017 & 25,000
\end{array}$ 
What was the economic effect of the payment of Lewis's dividends?
A)The dividends reduced net income for 2017.
B)The dividends should be equal to net income if the company's accounting equation is in balance.
C)The dividends reduced total retained earnings for the year.
D)The dividends must be paid whenever Lewis Corporation reports net income.

Quizplus · Accepted Answer

Dividends reduce retained earnings because they are distributions of earnings to shareholders. They do not affect net income directly, nor do they need to equal net income or be paid whenever there is net income.

Lewis Corporation Reported the Following Information for the Year Ended