A Level Accounting (9706)•9706/11/O/N/22
Explanation
Retained earnings = opening balance + net profit - dividends (bonus from general reserve ignored) Steps:
- Begin with opening retained earnings balance of $958,000 on 1 April 2021.
- Compute net profit by subtracting debenture interest paid (978,000).
- Add net profit to opening balance and subtract ordinary share dividends paid ($150,000).
- Confirm bonus shares issued from general reserve do not reduce retained earnings, as reserves are separate. Why B is correct:
- Matches the accounting formula: closing retained earnings = opening + (profit before interest - interest) - dividends, excluding bonus capitalization from general reserve (per equity accounting standards). Why the others are wrong:
- A incorrectly deducts bonus issue value ($250,000) from retained earnings.
- C forgets to deduct debenture interest, overstating net profit.
- D adds back dividends or misapplies interest deduction. Final answer: B
Topic: Preparation of financial statements
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