OTHER COMPONENTS OF SHAREHOLDERS’ EQUITY 85.

Retained earnings represents a company's:

Other Components of Shareholders’ Equity A. Undistributed net income. C. Extra paid-in capital.
Accumulated profits or retained earnings B. Undistributed net assets. D. Undistributed cash. S, S & T
Other reserves
Appropriation reserve
43. The amount of shareholders’ equity that the corporation has earned through profitable
Additional paid-in capital
operation of the business and has not given back to shareholders is:
Revaluation reserve
A. outstanding shares. C. treasury shares.
Unrealized gains or losses on AFS
B. legal capital. D. retained earnings. HHT&S 8E
Foreign currency translation differences
7. Team Shirts has a balance in retained earnings of $15,000. This amount is ________.
A. matched by the amount of cash in the Cash account
Retained Earnings or Accumulated Profits (Losses)
B. the amount of cash available for dividends
Nature
C. the amount of net income kept by Team Shirts
Claim on aggregate assets
D. the cash amount received from the sale of stock Reimers 3e
192.A credit balance in retained earnings represents
a. the amount of cash retained in the business.
5. Retained earnings are ________.
b. a claim on specific assets of the corporation.
A. increased by net income since the day the company began
c. a claim on the aggregate assets of the corporation.
B. increased by net losses since the day the company began
d. the amount of stockholders' equity exempted from the stockholders' claim on total assets.
C. increased by dividends declared to shareholders since the company began
D. increased when additional shares of stock are sold Reimers 3e
Earned equity, capital or surplus
91. Which of the following is the preferred term for describing the earned equity portion of Reinvested income
stockholders’ equity? 60. Retained earnings represents:
A. Retained earnings C. Accumulated surplus A. Cash available for dividends.
B. Earned surplus D. Capital surplus CPAR B. The amount initially invested in the business by stockholders.
C. Cash available for expansion and growth.
53. Retained earnings represent: D. Income that has been reinvested in the business rather than distributed as dividends to
A. Earned capital. C. Assets. stockholders.
B. Cash. D. Net assets. S, S & T
Comprehensive
6. Retained earnings is also called ________ capital. . Retained earnings
A. additional paid-in C. contributed A. represent the amount of earnings that the firm has earned since its inception
B. earned D. paid-in Reimers 3e B. may also be called earned capital
C. represent the amount of earnings that the firm has earned since its inception minus any
*. The modern accounting terminology for earned surplus declared dividends
a. Retained earnings reservation. c. Capital contribution in excess of par value. D. Both (b) and (c) are correct
b. Additional paid-in capital. d. Retained earnings. RPCPA 0577, 1089
. Retained earnings
Undistributed net income a. is profit that is retained by the company.
 b. can be used for the declaration of dividends. b. a negative retained earnings balance
c. reflects cash paid into the company by shareholders. c. a negative cash balance
d. a. and b. d. a negative stockholders' equity total NB&J 11e

Formula . Which statement concerning retained earnings is correct?

2. Retained earnings is the ________.
A. past profits and dividends maintained in treasury
B. beginning retained earnings plus net income minus dividends
C. past distributed profits
D. minimum legal capital that must be retained by the company
a. A debit balance in retained earnings is referred to as a deficit.
b. A debit balance in retained earnings is transferred to the share capital account.
c. A debit balance in retained earnings means that the company is in liquidation.
d. All of retained earnings must paid out as dividends or companies are liable to pay tax on
Reimers 3e the balance at 50%

Revenue, net income & retained earnings lifetime losses and dividends exceeds lifetime earnings
64. Which of the following best describes the relationship between revenue and retained 12. A retained earnings deficit indicates that:
earnings? A. a company has experienced a net loss for the current year.
A. Revenue increases net income, which in turn increases retained earnings. B. treasury shares was reissued at a loss.
B. Revenue represents a cash receipt; retained earnings is an element of stockholders' C. a proposed dividend payment exceeds the existing cash on hand.
equity. D. a company's lifetime losses and dividends exceed lifetime earnings. HHT&S 8E
C. Revenue represents the price of goods sold or services rendered; retained earnings
represents cash available for paying dividends. Comprehensive
D. Retained earnings is equal to revenue minus expenses. 81. The following statements pertain to retained earnings. Which statement is incorrect?
A. The deficit is a debit balance in retained earnings.
Net loss B. The deficit may be presented as an asset.
193.A net loss C. Retained earnings may be classified as appropriated and unappropriated.
a. occurs if operating expenses exceed cost of goods sold. D. Dividends can be declared from unappropriated retained earnings. CPAR
b. is not closed to Retained Earnings if it would result in a debit balance.
c. is closed to Retained Earnings even if it would result in a debit balance. 81. The retained earnings balance reported on the balance sheet typically is not affected by:
d. is closed to the paid-in capital account of the stockholders' equity section of the balance A. Net income. C. Dividends paid.
sheet. B. A prior period adjustment. D. Restrictions. S, S & T

Deficit Appropriated retained earnings

Debit balance in retained earnings Reserve
46. The term “deficit” refers to *. The use of the term “reserve” is preferably limited to
A. An excess of current assets over current liabilities a. Actual liabilities of known amounts. c. Appropriation of retained earnings.
B. An excess of current liabilities over current assets b. Estimated liabilities. d. Valuation accounts. RPCPA 1083
C. A debit balance in retained earnings
D. A loss that is reported as a prior period adjustment CPAR *. To avoid confusing readers of financial statements, it has been recommended that the use of
the term “reserve” be limited to RPCPA 0578
36. The term deficit in financial accounting means a. Designate asset valuation accounts. c. Sinking fund appropriations.
a. net loss b. Deposits actually set aside. d. Appropriations of retained earnings.
 amounts available for dividends because of such a contingency. K, W & W
*. The Committee on Terminology of the PICPA, in its Accounting Terminology Bulletin No. 1 has
1
recommended that the use of the term “reserve” be restricted to . A retained earnings appropriation can be used to
a. Inventory and fixed asset reduction accounts. a. Absorb a fire loss when a company is self-insured.
b. Allowances for uncollectible receivables. b. Provide for a contingent loss that is probable and reasonable.
c. Allowances for estimated liabilities. c. Smooth periodic income.
d. Appropriations of retained earnings. RPCPA 1079 d. Restrict earnings available for dividends. AICPA 0592

35. Preferred terminology limits the use of the term "reserve" to 62. Retained earnings appropriated account is created for the purpose of
a. funds accumulated for the replacement of fixed assets. A. Earmarking cash to be used for particular purposes
b. estimated liabilities. B. Insuring the payment of dividends
c. appropriations of retained earnings. C. Protecting the working capital position
d. valuation (contra) accounts. K, W & W D. Preventing losses from contingencies CPAR

*. The term “reserve” in the financial statements may be used to identify Legal requirement
a. The estimated amount of uncollectible accounts receivable. 80. A restriction of retained earnings:
b. The accumulated amount of depreciation on long-lived assets. A. Reduces the dollar amount of retained earnings shown in the balance sheet.
c. The portion of retained earnings appropriated for a specific purpose. B. Appears in the statement of retained earnings as a reduction of ending retained earnings.
d. The amount of expected liability out of a contingency. RPCPA 0585 C. Appears in the liability section of the balance sheet.
D. Limits the dollar amount of dividends a corporation may declare.
*. The term “reserve” in financial statements should be used to identify
a. The decline in value of fixed assets that must be replaced in the future. 189.Restricting retained earnings for the cost of treasury stock purchased is a
b. An amount of funds being accumulated to satisfy or less the effect of an unresolved a. contractual restriction. c. stock restriction.
contingency. b. legal restriction. d. voluntary restriction.
c. An amount of retained earnings identified for a specific purpose.
d. The probable amount of uncollectible accounts receivable. K, W & W, RPCPA 0582 40. A restriction of retained earnings is most likely to be required by
a. incurring a net loss in the current year. c. purchasing treasury stock.
Purpose b. incurring a net loss in the prior year. d. reissuing treasury stock. S, S & S
30. A retained earnings appropriation always means the company is
a. setting aside cash for a specific purpose. c. preventing unusual losses. 33. A restriction of retained earnings is most likely to be required by the
b. disclosing managerial policy. d. improving the debt-equity ratio. K, W & W a. exhaustion of potential benefits of the investment credit.
b. purchase of treasury stock.
31. For which of the following purposes should an appropriation for indefinite possible future c. payment of last maturing series of a serial bond issue.
losses on inventory be established? d. incurrence of a net loss in a prior year. K, W & W
a. To match current revenues with applicable costs.
b. To reduce fluctuations in net income in order to lend stability to the company. Contractual obligation
c. To charge operations in period of rising prices for the losses which may otherwise be 195.Retained earnings are occasionally restricted
absorbed in periods of falling prices. a. to set aside cash for dividends.
d. To inform stockholders that a portion of retained earnings should be set aside from b. to keep the legal capital associated with paid-in capital intact.
 c. due to contractual loan restrictions.
d. if preferred dividends are in arrears.
2
. An appropriation of retained earnings by the board of directors of a corporation for bonded
indebtedness will result in
A. The establishment of a sinking fund to retire bonds when they mature.
B. A decrease in cash on the balance sheet with an equal increase in the investment and
funds section of the balance sheet.
C. A decrease in the total amount of retained earnings presented on the balance sheet.
D. The disclosure that management does not intend to distribute assets, in the form of
dividends, equal to the amount of the appropriation. CMA 0692 2-2
Optional appropriation
191.If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant
expansion, the effect of this action is to
a. decrease total assets and total stockholders' equity.
b. increase stockholders' equity and decrease total liabilities.
c. decrease total retained earnings and increase total liabilities.
d. reduce the amount of retained earnings available for dividend declarations.
3
. An appropriation of retained earnings by the board of directors of a corporation for future plant
expansion will result in
A. The establishment of a fund to help finance future plant expansion.
B. A decrease in cash on the balance sheet with an equal increase in the investments and
funds section of the balance sheet.
C. The disclosure that management does not intend to distribute, in the form of dividends,
assets equal to the amount of the appropriation. CMA 0690 3-7
D. A decrease in the total amount of retained earnings presented on the balance sheet.
4
. An appropriation of retained earnings by the board of directors of a corporation for future plant
expansion will result in
A. The establishment of a fund to help finance future plant expansion.
B. The setting aside of cash to be used for future plant expansions.
C. A decrease in cash on the balance sheet with an equal increase in the investments and
funds section of the balance sheet.
D. The disclosure that management does not intend to distribute, in the form of dividends,
assets equal to the amount of the appropriation. CMA 0694 2-30
Comprehensive
*. The following statements relate to appropriations of retained earnings:
 Appropriations have no effect on total retained earnings.
 The only proper way to eliminate an appropriation of retained earnings after it has served
its purpose is to credit the unappropriated retained earnings account.
 An appropriation of retained earnings means that assets are segregated for a special
purpose.
 When treasury stock is purchased, retained earnings should always be appropriated equal
to the par or stated value of such stock.
a. None of the statements is true. c. Only two statements are true.
b. Only one statement is true. d. Three statements are true. RPCPA 1091
31. Select the statement that is incorrect concerning the appropriations of retained earnings.
a. Appropriations of retained earnings do not change the total amount of stockholders'
equity.
b. Appropriations of retained earnings reflect funds set aside for a designated purpose, such
as plant expansion.
c. Appropriations of retained earnings can be made as a result of contractual requirements.
d. Appropriations of retained earnings can be made at the discretion of the board of
directors. S, S & S
29. Select the statement that is incorrect concerning the appropriations of retained earnings. (E)
a. Appropriations of retained earnings reflect funds set aside for a designated purpose, such
as plant expansion. S&S 18e
b. Appropriations of retained earnings do not change the total amount of stockholders'
equity.
c. Appropriations of retained earnings can be made as a result of contractual requirements.
d. Appropriations of retained earnings can be made at the discretion of the board of
directors.
86. Attributes of appropriated retained earnings or reserves of retained earnings as they are used
in the United States, include all of the following except:
a. appropriated retained earnings or reserves can be purely discretionary so as to disclose
specific intentions of management
b. appropriated retained earnings or reserves can mean a restriction on dividend declaring
power
c. appropriated retained earnings or reserves can be an offset to an asset
d. appropriated retained earnings or reserves represent restrictions on retained earnings
e. appropriated retained earnings or reserves can be an estimate of a definite liability of an
uncertain amount
 76. Which of the following would be treated as a prior period adjustment by Hawk Corporation in
207.Which of the following statements about retained earnings restrictions is incorrect?
a. Many states require a corporation to restrict retained earnings for the cost of treasury
stock purchased.
b. Long-term debt contracts may impose a restriction on retained earnings as a condition for
the loan.
c. The board of directors of a corporation may voluntarily create retained earnings
restrictions for specific purposes.
d. Retained earnings restrictions are generally disclosed through a journal entry on the
books of a company.
2007?
A. In 2007, it was discovered that Hawk Corporation recorded the purchase of a warehouse
in 2004 as a debit to Repairs Expense.
B. In 2007, Hawk Corporation switched from the straight-line method of depreciation to
another method of computing depreciation.
C. In 2007, Hawk Corporation’s management decided that the estimated useful life of its
computer equipment should be changed from five years to nine years.
D. In 2007, Hawk Corporation sold a segment of the business that it has operated since
1996.

84. Which of the following statements does not represent a retained earnings restriction? 78. After preparing the financial statements for 2007, the accountant for the Advanced Corporation
a. Dividends cannot be declared if retained earnings is negative. discovered that a prior period adjustment had been omitted from the 2007 financial
b. A portion of retained earnings can be restricted or appropriated. statements. Which of the following is most likely to require correction as a result of this
c. The dividends declared in any year cannot exceed the net income generated in that year. oversight?
d. Typically, dividends cannot be so large as to reduce total stockholders' equity below total A. Earnings per share as originally computed.
paid-in capital. B. Net income for 2007 as originally reported.
e. For a dividend to be declared, retained earnings must exceed the cost of treasury stock. C. Ending retained earnings at December 31, 2007.
D. Extraordinary items as originally reported.
Accounting for Accumulated Profits (Losses)
Change in Accounting Policy
Prior Period Adjustments Change in Accounting Estimate
41. A prior period adjustment is a correction made to: Accounting Errors
A. Retained earnings of the beginning of the period Current Period Errors
B. Retained earnings at the end of the period Prior Period Errors
C. Net income of the current year Distinction of Change in Accounting Estimate and Prior Period Errors
D. Only to last years’ financial statements
Closing the Current Net Income (Loss)
40. A company failed to make an adjusting entry in the prior year to accrue earned revenue. To
correct this they should: Declaration of Dividends
A. Correct last year’s statement by increasing net income
B. Correct this year’s statements with a prior period adjustment increasing beginning Reserves
retained earnings Additional paid-in capital
C. Correct this year’s statements with a prior period adjustment decreasing beginning Appropriation reserve
retained earnings. Asset revaluation surplus
D. Correct this year’s statements with a prior period adjustment increasing ending retained Fair value differences
earnings.
Additional Paid-in Capital
Transfer to and from Reserves a. may only increase retained earnings.
b. may only decrease retained earnings.
Revaluation Reserves c. may either increase or decrease retained earnings.
Basis of revaluation d. do not affect retained earnings.
Treatment of Revaluation Increase
Treatment of Revaluation Decrease Journal Entries
Revaluation Prior period adjustments
Appraised Value 190.A prior period adjustment that corrects income of a prior period requires that an entry be made
Appreciation to
Sound Value a. an income statement account.
Book Value b. a current year revenue or expense account.
Revaluation Surplus c. the retained earnings account.
Condition Percent d. an asset account.

Fair Value Differences . A prior period error adjustment, correcting an understatement of profit, will
a. be credited to the retained earnings account.
Foreign Currency Translation b. be debited to the retained earnings account.
c. be shown as a gain on the current year's income statement.
Translating Financial Statements from Foreign Currency d. be credited to an asset account on the current year's statement of financial position.

Effect on particular accounts 197.A prior period adjustment for understatement of net income will
Retained earnings a. be credited to the Retained Earnings account.
131.Each of the following decreases retained earnings except a b. be debited to the Retained Earnings account.
a. cash dividend. c. show as a gain on the current year's Income Statement.
b. liquidating dividend. d. show as an asset on the current year's Balance Sheet.
c. stock dividend.
d. All of these decrease retained earnings. Financial Statement Presentation
Shareholders’ equity
Effect of transactions 20. Which of the following items affects total shareholders' equity without being reported on the
Appropriated Retained Earnings income statement?
Retained earnings, stockholders’ equity A. purchase of treasury stock C. discontinued operations
59. If a corporation appropriates retained earnings for treasury stock transactions, the B. extraordinary items D. repayment of long-term debt
appropriation will affect total amounts for retained earnings and stockholders' equity as
NB&J 11e A B C D 21. Which of the following items affects total shareholders' equity without being reported on the
Total retained earnings Decrease Decrease No effect No effect income statement?
Total stockholders’ equity Decrease No effect No effect Decrease A. discontinued operations
B. extraordinary items
Prior period adjustments C. sale of common stock at a price above par
208.Prior period adjustments D. purchase of property, plant and equipment in exchange for a long-term note
Retained earnings Income Statement
Deficit Organization costs
61. A deficit appears in a corporation's financial statements: 90. In the financial statements, organization costs appears
A. Among the operating expenses. a. immediately below Retained Earnings in the stockholders' equity section.
B. Among the liabilities. b. in the income statement.
C. As an element of total paid-in capital. c. as part of paid-in capital in the stockholders' equity section.
D. As a deduction from total paid-in capital. d. as an intangible asset.

13. If a company has a deficit in retained earnings: Not an income statement item
A. the deficit is subtracted to determine total shareholders’ equity. 85. Which of the following does not appear in a corporate income statement?
B. the deficit is added to determine total shareholders’ equity. A. Gains and losses from treasury stock transactions.
C. then retained earnings has a credit balance. B. Income tax expense.
D. both A and C are true. HHT&S 8E C. The income or loss from a segment of the business that has been discontinued during the
current year.
Appropriated Retained Earnings D. Gains and losses not expected to recur in the foreseeable future.
5
. A clearly identified appropriation of retained earnings for reasonably possible loss
contingencies should be Comprehensive
A: Charged with all losses related to that contingency. . Which of these is reported on the income statement of a company?
B: Transferred to income as losses are realized. a. profit before tax. c. profit after tax.
C: Classified in the liability section of the balance sheet. b. income tax expense. d. all are reported.
D: Shown within the stockholders’ equity section of the balance sheet. Wiley 2011
Statement of changes in shareholders’ equity
70. Appropriations of retained earnings 4. Which financial statement is the best place to look to determine the amount of dividends
A. Are reflected as separate amounts in the equity section of the balance sheet DECLARED?
B. Are noncurrent liabilities A. Income statement
C. Are charged to income B. Statement of changes in shareholders’ equity
D. Are current liabilities CPAR C. Balance sheet
D. Statement of cash flows Reimers 3e
Prior period adjustments
57. If a company makes a prior period adjustment, which of the following describes how it must be 83. The statement of stockholders' equity:
reported? A. Is a required financial statement.
a. The adjustment is recorded in retained earnings, and previous years' financial statements B. May be issued as a substitute for the statement of retained earnings.
presented for comparative purposes are not changed. C. Shows the changes during the year in all stockholders' equity accounts except retained
b. The adjustment is recorded in retained earnings, and previous years' financial statements earnings.
presented for comparative purposes are adjusted. D. Is a statement sent to each stockholder showing that person's return on equity.
c. The adjustment is reported in the current period's income statement as a separate item.
d. The adjustment is recorded as a deferred asset or deferred liability and amortized using 84. A statement of stockholders' equity discloses each of the following except:
the straight-line method. NB&J 11e A. The market value of the stockholders' equity at the end of the year.
 B. The cost of treasury stock owned at the end of the year. c. on the current year's income statement.
C. Net income for the current year. d. on the current year's retained earnings statement.
D. The amount of cash dividends declared during the current year.
Cash Flow Statements
Statement of retained earnings Equity transactions
198.The retained earnings statement 9. Because a company is dealing with its owners, on the statement of cash flows, equity
a. is the owners' equity statement for a corporation. transactions are:
b. will show an addition to the beginning retained earnings balance for an understate-ment of A. financing activities. C. investing activities. HHT&S 8E
net income in a prior year. B. operating activities. D. not part of the statement of cash flows.
c. will not reflect net losses.
d. will, in some cases, fail to reconcile the beginning and ending retained earnings balances. Issuance
5. Proceeds from the issuance of shares appear in which, if any, section of the statement of cash
Prior period adjustments flows?
79. A prior period adjustment appears in the financial statements of the current year when: A. They do not appear in the statement of cash flows.
A. An error was made in computing the net income of the current period. B. They appear in the operating activities section.
B. An error was made in measuring the net income of a previous year or years. C. They appear in the financing activities section.
C. An extraordinary loss in a prior year was included among normal results of operations in D. They appear in the both the operating and financing activities sections. HHT&S 8E
the prior year.
D. Earnings per share figures from prior years are restated to reflect the increased number of 86. Proceeds from the issuance of stock appear in which, if any, section of the statement of cash
shares outstanding due to a stock split or a stock dividend. flows?
a. operating activities section
73. If a material accounting error was made in a prior year, that error: b. financing activities section
A. Should be reflected on the current year's income statement. c. both operating and financing activities sections
B. Should be reflected, net of taxes, on the retained earnings statement. d. Proceeds from the issuance of stock do not appear in the statement of cash flows.
C. Should be reflected as a change in accounting principle.
D. Should be considered as an extraordinary item and shown, net of taxes on the income 6. The issuance of ordinary shares in exchange for cash will:
statement. A. not affect the statement of cash flows.
B. affect the financing activities section of the statement of cash flows.
77. A prior period adjustment appears in: C. affect the operating activities section of the statement of cash flows.
A. The income statement following the subtotal "Income before Prior Period Adjustments." D. affect the investing activities section of the statement of cash flows. HHT&S 8E
B. The statement of retained earnings as an adjustment to the ending balance of retained
earnings. Reissuance
C. Footnotes to the financial statements. 7. The reissuance of treasury shares at a price above its cost is reported in the statement of cash
D. The statement of retained earnings as an adjustment to the beginning balance of retained flows:
earnings. A. operating activities section. C. financing activities section. HHT&S 8E
B. investing activities section. D. financing and operating activities sections.
194.Prior period adjustments are reported
a. in the footnotes of the current year's financial statements. Cash dividend
b. on the current year's balance sheet.
45. Cash dividends paid to stockholders will appear in which section of the statement of cash
flows:
A. Operating C. Financing
B. Investing D. Discontinued

Stock dividend
8. Share dividends distributed appear in which, if any, sections of the statement of cash flows?
A. Financing and investing activities sections
B. Operating activities section
C. Operating and investing activities sections
D. Does not appear anywhere in the statement of cash flows HHT&S 8E

89. Stock dividends distributed appear in which, if any, section of the statement of cash flows?
a. financing and investing activities section
b. operating and investing activities section
c. operating activities section only
d. The distribution of a stock dividend does not appear anywhere in the statement of cash
flows.

Nonmonetary exchange
87. The issuance of common stock in exchange for land and equipment will:
a. affect the financing activities section of a statement of cash flows
b. affect the operating activities section of a statement of cash flows
c. not affect a statement of cash flows
d. affect the investing activities section of a statement of cash flows
1
.REQUIRED: The use of a retained earnings appropriation.
DISCUSSION: (D) According to APB 9, “transfers to and from accounts properly designated as appropriated retained
earnings (such as general purpose contingency reserves or provisions for replacement costs of fixed assets)” are
always excluded from the determination of net income. However, appropriation of retained earnings is permitted if it is
show within the shareholders’ equity section and is clearly identified (SFAS 5). The effect of the appropriation is to
restrict the amount of retained earnings available for dividends, not to set aside assets.
Answers (A), (B), and (C) are incorrect because costs and losses are not charged to an appropriation of retained
earnings and no part may be transferred to net income.
2
.Answer (D) is correct. The appropriation of retained earnings is a transfer from one retained earnings account to
another. The only practical effect is to decrease the amount of retained earnings available for dividends. An
appropriation of retained earnings is purely for disclosure purposes.
Answer (A) is incorrect because the establishment of a sinking fund is entirely independent of appropriating retained
earnings. Answer (B) is incorrect because cash is unaffected. Answer (C) is incorrect because the total retained
earnings will not change; however, the total will appear as the sum of two retained earnings accounts instead of one.
3
.Answer (C) is correct. The appropriation of retained earnings essentially has no effect on any aspect of the financial
records. An appropriation is intended solely to disclose to the readers of financial statements that the company has no
intention to distribute a portion of retained earnings to shareholders as dividends. An appropriation is most commonly
recorded by means of a footnote to the financial statements. If journal entries are recorded, the effect is to increase one
retained earnings account while simultaneously decreasing another retained earnings account, with no net effect on total
retained earnings.
Answer (A) is incorrect because no fund is established when retained earnings are appropriated. Answer (B) is incorrect
because cash is not involved in an appropriation. Answer (D) is incorrect because there is no net effect on retained
earnings.
4
.Answer (D) is correct. An appropriation of retained earnings simply transfers a portion of the retained earnings balance
into a separate retained earnings account. The sole purpose of such an event is to disclose that earnings retained in the
business are to be used for special purposes and will not be available for dividends. The same result could be obtained
as effectively by a footnote. No funds are set aside by an appropriation of retained earnings.
Answer (A) is incorrect because no fund is established by the appropriation of retained earnings. Answer (B) is incorrect
because no cash is involved in an appropriation of retained earnings. Answer (C) is incorrect because no cash is
involved in an appropriation of retained earnings.
5
.Answer D is correct because an amount that is clearly identified as an appropriation of retained earnings should be
shown within the stockholders' equity section of the balance sheet.
Answer A is incorrect because appropriations should not be debited to record the occurrence of a loss. This would
result in incurred losses never being reported in the income statement. Answer B is incorrect because no part of the
appropriation should be transferred to income. This would in effect cancel out the losses which should be recognized.
Answer C is incorrect because an appropriation of retained earnings should be classified within the stockholders' equity
section. An appropriation simply means that part of retained earnings is labeled as unavailable for dividends. It is not
an incurred liability, although it may indicate there is a possible future liability.