Student Question
“I have another question for you. I got the below question right but I thought that this was a tricky question. Why is it that D is the correct answer?
I feel like A and C could also be correct since the retained earnings are being used to fund the project and the actual journal entry for recording appropriate retained earnings is actually Debiting (decreasing) Retained Earnings.
Thank you for all of your help.”
– Brian
MCQ
An appropriation of retained earnings by the board of directors of a corporation for future plant expansions results in:
A. The establishment of a fund to help finance the future plant expansion
B. A decrease in cash on the balance sheet with equal increase in the investments and funds portion 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, in the form of dividends, assets equaling the amount of the appropriation (Correct Answer)
1-on-1 CMA Coaching Support: Understanding Appropriated Retained Earnings
So what are appropriated retained earnings, anyway?
Appropriated retained earnings are part of the total retained earnings that have been earmarked by a Board of Directors for various specific purposes. This can include things like research and development, stock repurchase, debt reduction, or acquisitions. This portion of the retained earnings, therefore, is not paid out to investors as a dividend.
LOS: Identify transactions that affect paid-in capital and those that affect retained earnings
The entry for the appropriation of Retained Earnings is:
| DEBIT | CREDIT | ||||
| Retained Earnings – Appropriated | xxx | ||||
| Retained Earnings – Unappropriated | xxx | ||||
Therefore, the entry for the appropriation of Retained Earnings does not affect any financial statement account. Simply, it was just a transfer of Unappropriated (Available for Dividend Distribution) Retained Earnings to Appropriated Retained Earnings. The entry does not also affect the total shareholder’s equity balance. This is why Choice B and C are incorrect answers.
ASC 505-10-45-3 permits an appropriation of retained earnings if it is shown within stockholders’ equity on the balance sheet and is clearly identified as such (disclosure).
Choice D is the best answer.
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One Comment on “CMA Part 1 Q&A: Appropriated Retained Earnings”
I think the correct entry to appropriate is:
Debit: Retained Earnings – Unappropriated
Credit: Retained Earnings – Appropriated
Basically, RE’s normal balance is in credit. Hence, a debit to Appropriated RE means reducing it.