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Chrystal Gems Ltd was set up with share capital of $500,000. In year 1 a loss of $50 000 was recorded, in year 2 a profit of $175,000 and in year 3 a profit of $350,000. Also in year 3 a dividend of 5% of paid up capital was paid to shareholders and $20,000 was transferred from retained earnings to a general reserve. The retained earnings balance of Chrystal Gems Ltd at the end of year 3 was:$430,000.$530,000$475,000.$930,000.

Question

Chrystal Gems Ltd was set up with share capital of 500,000.Inyear1alossof500,000. In year 1 a loss of 50 000 was recorded, in year 2 a profit of 175,000andinyear3aprofitof175,000 and in year 3 a profit of 350,000. Also in year 3 a dividend of 5% of paid up capital was paid to shareholders and 20,000wastransferredfromretainedearningstoageneralreserve.TheretainedearningsbalanceofChrystalGemsLtdattheendofyear3was:20,000 was transferred from retained earnings to a general reserve. The retained earnings balance of Chrystal Gems Ltd at the end of year 3 was:430,000.530,000530,000475,000.$930,000.

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Solution

To calculate the retained earnings balance at the end of year 3, you need to consider the initial share capital, the profits and losses for each year, the dividends paid, and the amount transferred to the general reserve.

Here's how you calculate it:

  1. Start with the initial share capital of $500,000. However, this does not affect retained earnings, as retained earnings are accumulated profits and losses, not contributed capital.

  2. In year 1, a loss of 50,000wasrecorded.Thisdecreasesretainedearnings,sowesubtractit:50,000 was recorded. This decreases retained earnings, so we subtract it: 0 - 50,000=−50,000 = -50,000.

  3. In year 2, a profit of 175,000wasrecorded.Thisincreasesretainedearnings,soweaddit:−175,000 was recorded. This increases retained earnings, so we add it: -50,000 + 175,000=175,000 = 125,000.

  4. In year 3, a profit of 350,000wasrecorded.Thisalsoincreasesretainedearnings,soweaddit:350,000 was recorded. This also increases retained earnings, so we add it: 125,000 + 350,000=350,000 = 475,000.

  5. Also in year 3, a dividend of 5% of paid up capital was paid. This decreases retained earnings, so we subtract it: 5% of 500,000is500,000 is 25,000, so 475,000−475,000 - 25,000 = $450,000.

  6. Finally, in year 3, 20,000wastransferredfromretainedearningstoageneralreserve.Thisalsodecreasesretainedearnings,sowesubtractit:20,000 was transferred from retained earnings to a general reserve. This also decreases retained earnings, so we subtract it: 450,000 - 20,000=20,000 = 430,000.

So, the retained earnings balance of Chrystal Gems Ltd at the end of year 3 was $430,000.

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