Retained Earnings Mrs. Paz Castro

Restrictions on Retained Earnings

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A corporation may be required by law or contractual arrangements to set aside a portion of the retained earnings for specified purposes.
In addition, the board of directors may voluntarily designate a portion of retained earnings for future expenses, contingencies or other purposes (SFAS No. 18, paragraph 31).
This portion of the retained earnings is referred to as
restricted or appropriated retained earnings.
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Ex.: ABC Technologies, Inc. bought 1,000 of its shares at P150,000. A portion of the retained earnings is restricted for the cost of the treasury purchased.

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Ex.: ABC Technologies, Inc. bought 1,000 of its shares at P150,000. A portion of the retained earnings is restricted for the cost of the treasury purchased.

Retained Earnings 150,000 Appropriated Retained Earnings 150,000
To restrict retained earnings for the cost of treasury shares purchased.
It simply communicates that the restricted portion is not available for dividend declarations. Once the purpose of the restriction has been served, the appropriate retained earnings should be reversed to unappropriated retained earnings.
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If the treasury stocks are subsequently reissued, the restricted balance is reversed as follows:

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Appropriate Retained Earnings 150,000 Retained Earnings 150,000
To remove restriction on retained earnings.

Statement of Retained Earnings

• Not required per revised IAS No. 1.
• Normally divided into 2 major sections:

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Appropriated

• Presents the beginning balance of the retained earnings appropriated account, any additions or deductions during the period, and ending balance.

Unappropriated

• Shows the beginning balance of the retained earnings unappropriated account, correction of prior period error, profit or loss for the period, dividends, transfer to and from the appropriated and unappropriated accounts, and the ending balance.

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Bookstore Corporation Statement of Retained Earnings For the Year Ended Dec. 31, 2013
Appropriated:
Balance, 1/1/13 as reported
P 180,000

For Treasury Stocks, 4/8/13 Retained Earnings Appropriated, 12/31/13 Unappropriated:		100,000 P 280,000
Balance, 1/1/13, as previously reported		P1,414,500
Correction of Prior period error Balance, 1/1/13, as restated		100,000 P1,514,000
Add: Profit Total		480,000 P1,994,500
Less: Cash Dividends Declared	P 65,000