During the financial year 1 January 20X1 to 31 December 20X1, Beta Ltd incurred expenses of $250 and earned a net profit of $50. Retained profits at 1 January 20X1 were $70 and dividends declared and paid during 20X1 totalled $30. What was the balance of Beta Ltd’s retained profits as at 31 December 20X1?

Question

BlackTom AI · Accepted Answer

To solve this, start by identifying the components that affect retained profits: beginning retained profits, net profit (or loss) for the year, and dividends paid during the year.
Option A: $50. This would ignore the opening balance of retained profits (which was $70) and the dividends paid ($30). It also doesn’t account for the year’s net profit correctly when starting from a positive opening balance.
Option B: $30. This would be too low given there was a net profit of $50 added to the opening balance, and dividends of $30 were paid; it disregards the $70 carried in from before the year and the full $50 profit.
Option C: $150. This would be obtained if you added $70 opening retained profits to $50 net profit, but failed to subtract the $30 dividends. It ignores the effect of dividends reducing retained earnings.
Option D: $90. Here is the correct accounting: beginning retained profits = $70. Add net profit for the year = $50, so $70 + $50 = $120. Subtract dividends declared and paid = $30, resulting in $120 − $30 = $90. This matches how retained earnings are updated by profits and distributions within the period.
In summary, the retained profits at 31 December 20X1 are determined by starting with the opening balance, adding net income, and deducting dividends paid during the year. The calculation aligns with option D’s value, while the other options misstate one or more of these elements or ignore a component of the change in retained profits.

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