Step 1: Close Revenue accounts. Notice how the retained earnings balance is $6,100? The changes in retained earnings over a period of time are reported on statement of retained earnings. The above analysis can also be understood in the following manner. Dr Subsidiary retained earnings (deduct the profit in W2 – at reporting date) Cr Group inventory. We have then $77,232 + $5,297 – $3,797 = $78,732, which is in fact our figure for Ending Retained Earnings . Expert Answer 100% (2 ratings) Previous question Next question Test your understanding 4. D. the capital asset pricing model can be used. $9,000 + $10,000 - (500 x $10) = $14,000. Book value per share = $123,000 / $10,000 = $12.3 per share of common stock. In determining the cost of retained earnings A. the dividend valuation model is inappropriate. Video Explanation of Retained Earnings. $63,214 of this came from addition to retained earnings, so the remainder must have been the sale of new equity. C. growth is not considered. C) The cost of a firm's retained earnings is less than the cost of its bonds. Like paid-in capital, retained earnings is a source of assets received by a corporation. Select one: flotation costs are included. That means you would issue 500 shares in the dividend, each of them reducing retained earnings by $10: Current retained earnings + Net income - (# of shares x FMV of each share) = Retained earnings. The value will always be cheaper because it takes a weighted average of the equity and debt rates (and debt financing is cheaper). Below is a short video explanation to help you understand the importance of retained earnings from an accounting perspective. H bought 90% of the equity share capital of S, two years ago on 1January 20X2 when the retained earnings of S stood at $5,000.Statements of financial position at the year end of 31 December 20X3 areas follows: This means that on April 1, retained earnings … Close means to … 75. We can now calculate the book value per share. the capital asset pricing model (CAPM) can be used. B. flotation costs are included. New equity = Ending equity – Beginning equity – Addition to retained earnings New equity = $356,865 – 287,152 – 63,214 New equity = $6,499 What happened was the equity account increased by $69,713. Now we Cost of equity can be used to determine the relative cost of an investment if the firm doesn’t possess debt (i.e., the firm only raises money through issuing stock). The cost of retained earnings may, therefore, be taken at 10%. Suppose the earnings not retained by the company is passed on to the shareholders, and are invested by the shareholders in equity shares would be taken as the opportunity cost of the retained earnings. Retained earnings. The ending balance of retained earnings amount is reported as stockholders' equity on the balance sheet. The retained earnings portion of stockholders’ equity typically results from accumulated earnings, reduced by net losses and dividends. D) The cost of a firm's common stock is greater than the cost of its bonds. If the company had retained earnings of $23,000, then the total stockholder’s equity amounts to $123,000. We need to do the closing entries to make them match and zero out the temporary accounts. On the statement of retained earnings, we reported the ending balance of retained earnings to be $15,190. In determining the cost of retained earnings. growth is not considered. The WACC is used instead for a firm with debt. the dividend valuation model is not appropriate. 29) A firm has an issue of preferred stock that pays an annual dividend of $2.00 per share and currently is selling for $18.50 per share. Paid-in capital is the actual investment by the stockholders; retained earnings is the investment by the stockholders through earnings not yet withdrawn. 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