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Chapter 15: Question 28Q (page 810)

How are restrictions of retained earnings reported?

Short Answer

Expert verified

A debit is recorded for a restriction on retained profits. A deficit is defined as a debit balance in the Retained Earnings account.

Step by step solution

01

Meaning of Retained Earnings

The amount of a company's income that isn't distributed as dividends to shareholders and is instead held aside for reinvestment is known as retained earnings (RE).

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

Reporting of Retained Earnings

Retained earnings restrictions are best mentioned in a footnote to the financial statements. This provides for a more thorough explanation of the constraint.

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Most popular questions from this chapter

For what reasons might a corporation purchase its own stock?

What factors influence the dividend policy of a company?

(Preemptive Rights and Dilution of Ownership) Wallace Computer Company is a small, closely-held corporation. Eighty percent of the stock is held by Derek Wallace, president. Of the remainder, 10% is held by members of his family and 10% by Kathy Baker, a former officer who is now retired. The balance sheet of the company at June 30, 2017, was substantially as shown below.

Asset

Current assets \(22,000

Equipment (net) 450,000

\)472,000

Liabilities and Stockholders’ Equity

Current liabilities \(50,000

Common stock 250,000

Retained earnings 172,000

\)472,000

Additional authorized common stock of \(300,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued common stock with a par value of \)100,000 to himself at par for cash. At the next stockholders’ meeting, Baker objected and claimed that her interests had been injured.

Instructions

  1. Which stockholder’s right was ignored in the issue of shares to Derek Wallace?
  2. How may the damage to Baker’s interests be repaired most simply?
  3. If Derek Wallace offered Baker a personal cash settlement and they agreed to employ you as an impartial arbitrator to determine the amount, what settlement would you propose? Present your calculations with sufficient explanation to satisfy both parties.

(Recording the Issuances of Common Stock) During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock.

Jan. 10 Issued 80,000 shares for cash at \(6 per share.

Mar. 1 Issued 5,000 shares to attorneys in payment of a bill for

\)35,000 for services rendered in helping the company to

incorporate.

July 1 Issued 30,000 shares for cash at \(8 per share.

Sept. 1 Issued 60,000 shares for cash at \)10 per share.

Instructions

  1. Prepare the journal entries for these transactions, assuming that the common stock has a par value of \(5 per share.
  2. Prepare the journal entries for these transactions, assuming that the common stock is no-par with a stated value of \)3 per share.

Stock splits and stock dividends may be used by a corporation to change the number of shares of its stock outstanding.

  1. What is meant by a stock split effected in the form of a dividend?
  2. From an accounting viewpoint, explain how the stock split effected in the form of a dividend differs from an ordinary stock dividend.
  3. How should a stock dividend that has been declared but not yet issued be classified in a balance sheet? Why?
See all solutions

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