Chapter 18-2 - ACG 3141 Chapter 18 Equity Part 2(Class 23 1 Topics Go over Exam 3 Go over Class 22 homework Describe retained earnings and

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1 ACG 3141: Chapter 18 Equity Part 2 (Class 23)
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2 Topics Go over Exam 3 Go over Class 22 homework Describe retained earnings and distinguish it from paid-in capital Explain the basis of corporate dividends, including the similarities and differences between cash and property dividends. Explain stock dividends and stock splits and how they are accounted for.
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3 Learning Objectives Describe retained earnings and distinguish it from paid-in-capital.
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4 Retained Earnings Represents the undistributed earnings of the company since its inception. Undistributed earnings = Net income – Net Loss - Dividends Balance January 1, 2006 $ 500,000 Net income 25,000 Cash dividends (10,000) Balance December 31, 2006 515,000 $
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5 Retained Earnings The statement of retained earnings may also contain the correction of an accounting error that occurred in the financial statements of a prior period, called a prior period adjustment . Any restrictions on retained earnings must be disclosed in the notes to the financial statements. o If a restriction becomes an appropriation, it will be reflected in the statement of retained earnings. Note that the sale of repurchased stock could affect Retained Earnings if it is sold for less than it was purchased.
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6 Prior Period Adjustment We will be going over in Chapter 20. Prior period adjustments arise as the result of error corrections. For example, assume that in year 1, repair costs that should have been expensed were mistakenly capitalized into fixed assets. As a result, the year 1 net income was overstated by the difference between the total repair costs and the amount of depreciation expense related to these repairs. To correct the error, retained earnings at the beginning of year 2 are debited by this difference.
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7 Restrictions on Retained Earnings Management may decide that the corporation must keep its assets in order to meet certain goals or obligations: For example, there are plans for expansion that must be funded Creditors must be paid (debt covenants must be met) As a result, management decides that some portion of retained earnings is restricted. Restrictions communicate management’s intent to limit its ability to distribute its earnings as dividends Often, restrictions do not result in an accounting entry that affects the retained earnings account. Restrictions are disclosed in financial statement notes. In some cases, the need is so great that a journal entry formally reducing retained earnings is needed. This is called an appropriation .
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8 Restriction presentation Stockholders’ equity: Paid-in Capital $50,000 Retained earnings—Note X 250,000 Total stockholders’ equity $300,000 Note X— Long-term debt (or Restriction of retained earnings). The company’s long-term debt agreement restricts retained earnings in the amount of $200,000.
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9 Appropriations presentation Stockholders’ equity: Paid-in captial $50,000 Retained earnings: Appropriated for debt agreement $100,000 Unappropriated 150,000 Total retained earnings 250,000 Total stockholders’ equity $300,000
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This note was uploaded on 10/28/2009 for the course ACG 3141 taught by Professor Graybeal during the Spring '08 term at University of Central Florida.

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Chapter 18-2 - ACG 3141 Chapter 18 Equity Part 2(Class 23 1 Topics Go over Exam 3 Go over Class 22 homework Describe retained earnings and

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