Question 19.A.2: Blackwell’s Alternative Plan PROBLEM: Let’s continue the Bl...
Blackwell’s Alternative Plan
PROBLEM: Let’s continue the Blackwell Sales case. Suppose that Blackwell’s management now decides to pay a cash dividend but to reduce the payout to 10 percent of net income. Reconcile Blackwell’s retained earnings account.
APPROACH: First, we must calculate the new dividend payout and the amount of funds going into retained earnings. Since net income remains unchanged at $257,000, we calculate the dividends and addition to retained earnings by multiplying the net income by the payout and the retention percentages. Second, we must calculate the impact of the new dividend policy on the retained earnings account. An easy way to do this is to reconcile the retained earnings account.
The calculations for the new dividend payout and the addition to retained earnings are:
(1) Cash dividends = 0.10 × $257,000 = $25,700.
(2) Addition to retained earnings = 0.90 × $257,000 = $231,300.
The calculations to reconcile the retained earnings account are:
Thus, the new retained earnings balance is $821,300.