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Chapter 15: Question 27Q (page 810)

For what reasons might a company restrict a portion of its retained earnings?

Short Answer

Expert verified

The most common reason for a company's retained earnings to be restricted is that it is behind on paying past-due dividends.

Step by step solution

01

Meaning of Retained Earnings

Retained Earnings (RE) are the accumulated portion of a company's profits that aren't released as dividends to shareholdersand are instead set aside for reinvestment.

Retained earnings are reported on the balance sheet under the shareholder's equity section at the end of each accounting period. To calculate RE, first, add the beginning RE balance to the net income (or deduct it from a net loss), then subtract dividend payouts.

02

Reason might accompany restricting a portion of its Retained Earnings

Legal or contractual limits and the need to safeguard the working capital position limit retained earnings.

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Most popular questions from this chapter

Discuss the propriety of showing:

  1. Treasury stock as an asset.
  2. “Gain” or “loss” on sale of treasury stock as additions to or deductions from income.
  3. Dividends received on treasury stock as income.

(Cash Dividend and Liquidating Dividend) Lotoya Davis Corporation has 10 million shares of common stock issued and outstanding. On June 1, the board of directors voted an 80 cents per share cash dividend to stockholders of record as of June 14, payable June 3

Instructions

  1. Prepare the journal entry for each of the dates above, assuming the dividend represents a distribution of earnings.
  2. How would the entry differ if the dividend were a liquidating dividend?

(Preferred Stock Entries and Dividends) Otis Thorpe Corporation has 10,000 shares of \(100 par value, 8%, preferred stock and 50,000 shares of \)10 par value common stock outstanding at December 31, 2017.

Instructions

Answer the questions in each of the following independent situations.

  1. If the preferred stock is cumulative and dividends were last paid on the preferred stock on December 31, 2014, what are the dividends in arrears that should be reported on the December 31, 2017, balance sheet? How should these dividends be reported?
  2. If the preferred stock is convertible into seven shares of \(10 par value common stock and 4,000 shares are converted, what entry is required for the conversion assuming the preferred stock was issued at par value?
  3. If the preferred stock was issued at \)107 per share, how should the preferred stock be reported in the stockholders’ equity section?

Wilco Corporation has the following account balances on December 31, 2017.

Share capital—ordinary, \(5 par value \) 510,000

Treasury shares 90,000

Retained earnings 2,340,000

Share premium—ordinary 1,320,000

Instructions

Prepare Wilco’s December 31, 2017, equity section.

Before Gordon Corporation engages in the treasury stock transactions listed on the next page, its general ledger reflects, among others, the following account balances (par value of its stock is \(30 per share).

Paid-in Capital in Excess of Par Common Stock Retained Earnings

Common Stock

\)99,000 \(270,000 \)80,000

Instructions

Record the treasury stock transactions (given below) under the cost method of handling treasury stock; use the FIFO method for purchase-sale purposes.

(a) Bought 380 shares of treasury stock at \(40 per share.

(b) Bought 300 shares of treasury stock at \)45 per share.

(c) Sold 350 shares of treasury stock at \(42 per share.

(d) Sold 110 shares of treasury stock at \)38 per share.
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