Ending RE

CFA Level I
#1

I had a question yesterday that stated the following:

Beg RE: $2,000,000

Ni: $500,000

Dividends Declared: $400,000 (of which $70,000 were paid).

I thought End RE: Beg RE + NI - Dividends Paid

I did: $2,000,000 + $500,000 - $70,000

The answer was to subtract all of the dividends $400,000 instead of what was just paid.

Can someone explain this to me?

Answer: $2,000,000 + $500,000 - $400,000

Even this accounting website shows dividends paid…

https://www.accountingtools.com/articles/what-is-the-retained-earnings-formula.html

#2

They’re wrong.

When you declare dividends you remove them from Retained Earnings and put them into Dividends Payable (a liability).

When you pay dividends you remove them from Dividends Payable and remove the same amount from Cash.

I have a degree in accounting, and taught accounting for several years at university. I’m pretty sure on this one.

#3

Thank you! I’ll have to remember it is total dividens declared not just dividends paid.

#4

My pleasure.