Transferring from general reserve increases retained earnings

Steps:

• Retained earnings represent accumulated profits after dividends; a loss reduces this balance.
• Option 1: Dividends are payments from retained earnings, so issuing them (even at premium) decreases the balance.
• Option 2: Issuing shares at premium credits share premium reserve, not retained earnings directly.
• Option 3: Transferring from general reserve (a profit appropriation) adds to retained earnings without affecting current profits.

Why D is correct:

• Under accounting standards (e.g., IAS 1), transfers from general reserve to retained earnings reallocate accumulated profits, directly increasing the retained earnings balance.

Why the others are wrong:

• A and B include 1 and/or 2, which reduce or bypass retained earnings.
• C includes 2, which affects share capital/premium, not retained earnings.

Final answer: D