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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

What are the three classifications of restrictions of retained earnings, and how are such restrictions normally reported on the financial statements?

To determine

Retained Earnings

Retained earnings refer to the net income of the corporation that is retained in the corporation after distribution of dividends to the shareholders. Retained earnings are   component of stockholders’ equity and reflect the changes over a period of time. It is used for business development, purchase of treasury stocks and payment of liabilities.

To Determine: The three classifications of restrictions of retained earnings and reporting method on the financial statements.

Explanation
The three classifications of restriction of the retained earnings are as follows:

  1. Legal: Sometimes the state laws may restrict the corporation to use the retained earnings for a particular purpose.
  2. Contractual: Sometimes restrictions are imposed on the use of the retained earnings by the clause of a contract by the corporation...

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