The following information was drawn from the year-end balance sheets of White,Inc. $$\begin{array} { l r r }
& \text { Year } 2 & \text { Year } 1 \
\text { Bonds payable }& \$ 200,000 & \$275,000 \
\text { Common stock } & 112,500 & 87,500 \
\text { Treasury stock } & 17,500 & 12,500 \
\text { Retained earnings }& 35,000 & 27,500
\end{array}$$ The amount of net income shown on the Year 2 income statement was $17,500.There was no beginning or ending balance in the Dividends Payable account.What is the amount of cash outflows for dividends?
A) $7,500
B) $25,000
C) $17,500
D) $10,000

Question

The following information was drawn from the year-end balance sheets of White,Inc. $$\begin{array} { l r r } 
 & \text { Year } 2 & \text { Year } 1 \
 \text { Bonds payable }& \$ 200,000 &  \$275,000 \
\text { Common stock } & 112,500 & 87,500 \
\text { Treasury stock } & 17,500 & 12,500 \
\text { Retained earnings }& 35,000 & 27,500
\end{array}$$ The amount of net income shown on the Year 2 income statement was $17,500.There was no beginning or ending balance in the Dividends Payable account.What is the amount of cash outflows for dividends?
A) $7,500
B) $25,000
C) $17,500
D) $10,000

Quizplus · Accepted Answer

The retained earnings increased by $7,500 from Year 1 to Year 2 (from $27,500 to $35,000). Given that the net income was $17,500 and the increase in retained earnings was only $7,500, the difference of $10,000 represents the cash outflows for dividends.

The Following Information Was Drawn from the Year-End Balance Sheets