008 Stock Rights, Retained Earnings

Question 1

What is the effect of retained earnings appropriations on assets?

Answer 1

No effect on assets.

Question 2

Define “retained earnings appropriation”.

Answer 2

Management’s formal communication that a portion of retained earnings has been declared off-limits for dividends.

Question 3

What is often used to convey preemptive rights regarding stocks?

Answer 3

Stock rights.

Question 4

Describe the accounting entry to record stock rights issued to outside parties for service at issuance.

Answer 4

Record an expense and an owners’ equity account equal to the difference between the market price and exercise price, times the number of shares under option.

Question 5

Describe the accounting entry to record stock rights issued to outside parties for services at exercise of rights.

Answer 5

Record the stock issuance at the exercise price and remove the OE account credited at issuance of the rights.

Question 6

List the reasons for appropriating retained earnings.

Answer 6

1 Financial planning; 2 Legal requirement; 3 Contractual obligation.

Question 7

Define “restrictions on retained earnings”.

Answer 7

An external constraint placed on a certain portion of retained earnings by an external party.

Question 8

How should restrictions and appropriations on retained earnings be reported?

Answer 8

Disclosed in footnotes.