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corpo2 - Unit 8 Accounting for Changes in Stockholders...

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Unit 8 Accounting for Changes in Stockholders’ Equity Corporate Capital Owner's equity in a corporation is identified as stockholders' equity, shareholders' equity, or corporate capital. The stockholders' equity section of a corporation's balance sheet consists of: (a) paid-in (contributed) capital, and (b) retained earnings (earned capital). Paid-in or contributed capital is the investment of cash and other assets in the corporation by stockholders in exchange for capital stock. Retained earnings account is net income retained in a corporation and is part of the stockholders’ claim on the total assets of the corporation. The entire amount of retained earnings may be presumed to be unrestricted as to dividend declaration unless restrictions are indicated in the financial statements. a. Net income is recorded in Retained Earnings by a closing entry with a debit to Income Summary and a credit to Retained Earnings. Pro-forma entry: Income Summary xxx Retained Earnings xxx To close net income for the period. b. A net loss is debited to Retained Earnings in a closing entry. Pro-forma entry: Retained Earnings xxx Income Summary xxx To close net loss for the period. c. The retained earnings (earned capital) account is part of the stockholders' equity section of a corporation. d. A debit balance in Retained Earnings is identified as a deficit and is reported as a deduction in the stockholders’ equity section. Retained Earnings Restrictions 1. Retained earnings restrictions make a portion of the retained earnings balance currently unavailable for dividends. Marivic Valenzueala - Manalo 1
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2. Restrictions result from one or more of the following causes: a. Legal restrictions. Many states require a corporation to restrict retained earnings for the cost of treasury stock purchased. Pro-forma entry: Retained Earnings xxx Retained earnings appropriated for cost of treasury stocks xxx To record appropriation for cost of treasury shares. b. Contractual restrictions or any future contingencies. Long-term debt contracts may restrict retained earnings as a condition for a loan. Pro-forma entry: Retained Earnings xxx Retained earnings appropriated for contingencies xxx To record appropriation for future contingencies. c. Voluntary restrictions. The board of directors may voluntarily create retained earnings restrictions for specific purposes (for example, future plant expansion). Pro-forma entry: Retained Earnings xxx Retained earnings appropriated for plant expansion xxx To record appropriation for future plant expansion. 3. Retained earnings restrictions are generally disclosed in the notes to the financial statements. The retained earnings account has a normal credit balance. A debit balance in the retained earnings account is called a deficit .
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