The ending Retained Earnings balance of Boomer Inc. decreased by $1.0 million from the beginning of the year. The company declared a dividend of $5.4 million during the year. What was the net income earned during the year?

Question

BlackTom AI · Accepted Answer

To understand how net income relates to the changes in Retained Earnings, start from the fundamental relationship: Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings.
In this problem, the Ending Retained Earnings is stated to be $1.0 million less than the Beginning Retained Earnings, and the company paid dividends of $5.4 million during the year.
Option by option analysis:
- Option $7.5 million: If net income were $7.5 million, the change in Retained Earnings would be Beg RE + 7.5 − 5.4 = Beg RE + 2.1. This would imply an increase in Ending RE by $2.1 million relative to Beginning RE, not a decrease of $1.0 million. Therefore, this cannot be correct.
- Option $6.4 million: If net income were $6.4 million, Ending RE would be Beg RE + 6.4 − 5.4 = Beg RE + 1.0, again an increase of $1.0 million, not a decrease. This contradicts the given drop in Ending RE, so this is incorrect.
- Option $4.4 million: If net income were $4.4 million, Ending RE would be Beg RE + 4.4 − 5.4 = Beg RE − 1.0, which matches the stated decrease of $1.0 million. This aligns with the information provided.
- Option $1.0 million: If net income were only $1.0 million, Ending RE would be Beg RE + 1.0 − 5.4 = Beg RE − 4.4, a much larger decline than the given $1.0 million, making this option inconsistent with the problem data.
In summary, the equation Beg RE + NI − Dividends = End RE, combined with End RE = Beg RE − 1.0 and Dividends = 5.4, yields NI = 5.4 − 1.0 = 4.4 million. The incorrect choices fail to satisfy the relation between Beg RE, NI, Dividends, and End RE, producing either an excessive drop or an unwanted increase in End RE.

25/SP-ACC-220-1M3, ACC-220-103 Chapter One Quiz

The ending Retained Earnings balance of Boomer Inc. decreased by $1.0 million from the beginning of the year. The company declared a dividend of $5.4 million during the year. What was the net income earned during the year?

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