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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

Green Day Corporation has outstanding 400,000 shares of \(10 par value common stock. The corporation declares a 5% stock dividend when the fair value of the stock is \)65 per share. Prepare the journal entries for Green Day Corporation for both the date of declaration and the date of distribution.

McNabb Corp. had \(100,000 of 7%, \)20 par value preferred stock, and 12,000 shares of \(25 par value common stock outstanding throughout 2017.

  1. Assuming that total dividends declared in 2017 were \)64,000, and that the preferred stock is not cumulative but is fully participating, common stockholders should receive 2017 dividends of what amount?
  2. Assuming that total dividends declared in 2017 were \(64,000, and that the preferred stock is fully participating and cumulative with preferred dividends in arrears for 2016, preferred stockholders should receive 2017 dividends totaling what amount?
  3. Assuming that total dividends declared in 2017 were \)30,000, that the preferred stock is cumulative, nonparticipating, and was issued on January 1, 2016, and that $5,000 of preferred dividends were declared and paid in 2016, the common stockholders should receive 2017 dividends totaling what amount?

For what reasons might a corporation purchase its own stock?

What factors influence the dividend policy of a company?

Washington Company has the following stockholders’ equity accounts at December 31, 2017.

Common Stock (\(100 par value, authorized 8,000 shares) \)480,000

Retained Earnings 294,000

Instructions

a. Prepare entries in journal form to record the following transactions, which took place during 2018.

1. 280 shares of outstanding stock were purchased at \(97 per share. (These are to be accounted for using the cost method.)

2. A \)20 per share cash dividend was declared.

3. The dividend declared in (2) above was paid.

4. The treasury shares purchased in (1) above were resold at \(102 per share.

5. 500 shares of outstanding stock were purchased at \)105 per share.

6. 350 of the shares purchased in (5) above were resold at \(96 per share.

b.Prepare the stockholders’ equity section of Washington Company’s balance sheet after giving effect to these transactions, assuming that the net income for 2018 was \)94,000. State law requires restriction of retained earnings for the amount of treasury stock.
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