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Unformatted text preview: e that appropriations of retained earnings be disclosed in the financial statements
because they affect the magnitude of a company's future dividends. The magnitude of future dividends is
information that current and potential investors desire. Failure to adequately disclose such information
could cause investors to lose money on their investments and, consequently, to sue the auditor.
b. Common stock
Additional paidin capital
Retained earnings XX
Total stockholders' equity
c. $ XX The company can only declare a dividend equal only to the portion of retained earnings which exceed
$500,000. Since the debt covenant requires a minimum balance of $500,000 in the retained earnings
account, the board is constrained by that clause and could possibly declare dividends up to a maximum of
a. Cash (+A) 100,000
Preferred Stock (+SE)
100,000 Issued preferred stock.
Debt/Equity = Total Liabilities ÷ Stockholders' Equity
= $250,000 ÷ ($330,000 + $100,000)
= .58 b....
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