Torrence Inc. has the following data. If it uses the residual dividend model, how much total dividends, if any, will it pay out?
A) $183,264
B) $192,909
C) $203,063
D) $213,750
E) $225,000

Question

Quizplus · Accepted Answer

Using the residual dividend model, we must first calculate how much will be retained: 
Retained earnings = Net income - [(target equity ratio) x (total assets)]
Retained earnings = $1,200,000 - [(0.4) x $3,000,000]
Retained earnings = $1,080,000
Next, we calculate the dividends: 
Dividends = Net income - Retained earnings
Dividends = $1,200,000 - $1,080,000
Dividends = $120,000
Therefore, the total dividends that will be paid out is $120,000, which corresponds to choice E.