Accounting : Corporations: Dividends, Retained Earnings, and Income Reporting

Study concepts, example questions & explanations for Accounting

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Example Questions

Example Question #1 : Corporations: Dividends, Retained Earnings, And Income Reporting

A company provides  of services in April and is paid for these services in June. Which of the following is correct?

Possible Answers:

June's income statement will show an increase in accounts receivable of 

June's income statement will show revenue of 

April's income statement will show a receipt of  cash

April's income statement will show revenue of 

Correct answer:

April's income statement will show revenue of 

Explanation:

Revenue is recorded in the period that services are earned or goods are delivered,not in the period that cash is received; therefore, the company will record an increase in revenue of  and an increase in accounts receivable of  in the month of April. On the other hand, the company will record an increase in cash of  and a decrease in accounts receivable of  in the month of June. 

Example Question #2 : Corporations: Dividends, Retained Earnings, And Income Reporting

Which of the following is true regarding retained earnings? 

Possible Answers:

They are increased with net income (i.e. credit)

They increase when dividends are declared

They include preferred stock

They are decreased by net income (i.e. debit)

Correct answer:

They are increased with net income (i.e. credit)

Explanation:

Net income increases retained earnings; therefore, net income is considered to be credit. Dividends, once declared, decrease retained earnings. Last, preferred stock is not accounted in retained earnings.

Example Question #3 : Corporations: Dividends, Retained Earnings, And Income Reporting

For the current year, The Echo Company possessed the following income:

In the Echo Company's current year taxable income, how much should be included for dividends received? 

Possible Answers:

Correct answer:

Explanation:

This problem is asking us to determine the amount of dividends to be included in the Echo Company's taxable income for the current year. The dividends were received from 20%-owned taxable domestic corporations; therefore, they are eligible for an 80% dividends received deduction. We can compute this value using the following formula:

Example Question #4 : Corporations: Dividends, Retained Earnings, And Income Reporting

A company provides  of services in April and is paid for these services in June. Which of the following is correct?

Possible Answers:

April's income statement will show a receipt of  cash

June's income statement will show revenue of 

June's income statement will show an increase in accounts receivable of 

April's income statement will show revenue of 

Correct answer:

April's income statement will show revenue of 

Explanation:

Revenue is recorded in the period that services are earned or goods are delivered,not in the period that cash is received; therefore, the company will record an increase in revenue of  and an increase in accounts receivable of  in the month of April. On the other hand, the company will record an increase in cash of  and a decrease in accounts receivable of  in the month of June. 

Example Question #5 : Corporations: Dividends, Retained Earnings, And Income Reporting

Which of the following is true regarding retained earnings? 

Possible Answers:

They increase when dividends are declared

They include preferred stock

They are increased with net income (i.e. credit)

They are decreased by net income (i.e. debit)

Correct answer:

They are increased with net income (i.e. credit)

Explanation:

Net income increases retained earnings; therefore, net income is considered to be credit. Dividends, once declared, decrease retained earnings. Last, preferred stock is not accounted in retained earnings.

Example Question #6 : Corporations: Dividends, Retained Earnings, And Income Reporting

For the current year, The Echo Company possessed the following income:

In the Echo Company's current year taxable income, how much should be included for dividends received? 

Possible Answers:

Correct answer:

Explanation:

This problem is asking us to determine the amount of dividends to be included in the Echo Company's taxable income for the current year. The dividends were received from 20%-owned taxable domestic corporations; therefore, they are eligible for an 80% dividends received deduction. We can compute this value using the following formula:

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