Chapter 3, Problem 15E

To determine

Calculate the balance of retained earnings each year for Incorporation V and Incorporation R.

Answer to Problem 15E

The balance of retained earnings each year for the given companies is as follows:

Incorporation V				Incorporation R
Year	Net income (Net loss)	Retained earnings		Net income (Net loss)	Retained earnings
2012	$0	$0		$35	$11
2013	$30	$30		($43)	($32)
2014	($7)	$23		$63	$31
2015	$41	$64		$63	$94
2016	$135	$199		$102	$196
2017	$30	$229		$135	$331
2018	($131)	$98		($42)	$289
2019	$577	$675		$74	$363
2020	$359	$1,034		$110	$473
2021	$360	$1,394		$162	$635

Table (1)

Explanation of Solution

Retained earnings:

Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.

Working note:

1. Calculate the retained earnings Incorporation V.

Year 2013:

$\begin{array}{c}\text{Ending retained earnings}=\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ =\text{\$0 }\text{}+\$30\text{million}-\$0\\ =\$30\text{million}\end{array}$ (1)

Year 2014:

$\begin{array}{c}\text{Ending retained earnings}=\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{– Net loss – Dividends}\end{array}\right)\\ \text{= \$30 million }\text{}–\$7\text{million}-\$0\\ =\$23\text{million}\end{array}$ (2)

Year 2015:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$23 million }\text{}+\$41million-\$0\\ =\$64million\end{array}$ (3)

Year 2016:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$64 million }\text{}+\$135million-\$0\\ =\$199million\end{array}$ (4)

Year 2017:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$199 million }\text{}+\$30million-\$0\\ =\$229million\end{array}$ (5)

Year 2018:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{– Net loss – Dividends}\end{array}\right)\\ \text{= \$229 million }\text{}–\$131\text{million}-\$0\\ =\$98\text{million}\end{array}$ (6)

Year 2019:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$98 million }\text{}+\$577million-\$0\\ =\$675million\end{array}$ (7)

Year 2020:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$675 million }\text{}+\$359million-\$0\\ =\$1,034million\end{array}$ (8)

Year 2021:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$1,034 million }\text{}+\$360million-\$0\\ =\$1,394million\end{array}$ (9)

2. Calculate the retained earnings Company R.

Year 2013:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{– Net loss – Dividends}\end{array}\right)\\ \text{= \$11 million }\text{}–\$43\text{million}-\$0\\ =(\$32\text{million)}\end{array}$ (10)

Year 2014:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$(32 million ) }\text{}+\$63million-\$0\\ =\$31million\end{array}$ (11)

Year 2015:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$31 million }\text{}+\$63million-\$0\\ =\$94million\end{array}$ (12)

Year 2016:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$94 million }\text{}+\$102million-\$0\\ =\$196million\end{array}$ (13)

Year 2017:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$196 million }\text{}+\$135million-\$0\\ =\$331million\end{array}$ (14)

Year 2018:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{– Net loss – Dividends}\end{array}\right)\\ \text{= \$331 million }\text{}–\$42\text{million}-\$0\\ =\$289\text{million}\end{array}$ (15)

Year 2019:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$289 million }\text{}+\$74million-\$0\\ =\$363million\end{array}$ (16)

Year 2020:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$363 million }\text{}+\$110million-\$0\\ =\$473million\end{array}$ (17)

Year 2021:

$\begin{array}{c}\text{Ending retained earnings = }\left(\begin{array}{l}\text{Beginning retained earnings }\\ \text{+ Net income – Dividends}\end{array}\right)\\ \text{= \$473 million }\text{}+\$162million-\$0\\ =\$635million\end{array}$ (18)