CFA Practice Question

CFA Practice Question

On December 31, 2014, Eaton Corp. reported $1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in 2015 at a cost of $1,500,000. In 2015, Eaton appropriated $1,200,000 of retained earnings for the construction of a new plant. Also, $2,000,000 of cash was restricted for the retirement of bonds due in 2016. In its 2015 balance sheet, what amount should Eaton report as appropriated retained earnings?
A. $1,200,000
B. $1,450,000
C. $2,950,000
Explanation: Appropriating retained earnings is a formal way of marking a portion of retained earnings for other uses. This is done by reducing retained earnings and transferring the money to appropriated retained earnings. When the appropriation is no longer necessary, the money is moved back to retained earnings.

User Contributed Comments 10

User Comment
andrewsutton Anyone know why the cash "restricted for the retirement of bonds" is not included in the same category?
Jimmie A Bond sinking fund has its own account on the balance sheet
jckasn shouldnt this include the $250,000 left over when $1,750,000 was appropriated earlier and only $1,500,000 was spent on the new building, unless the question mentions that the balance was paid out as dividends?
CFAMarco i though the same, but if you see the explanation, this money is reversed to retained earnings
Xocrevilo Distinction is between appropriated retained earnings and other retained earnings.
tommyguard3 The $250,000 is reversed back to retained earnings (that's where I made my mistake too.) The restriced for retirement of bonds is not included because it is a use of cash not necessarily retained earnings.
rocku the answer should be : 1750000-1500000+1200000=1450000 any other reserved would not be the part of retain earning untill the purpose has been solved or obligation has been met. in 2016 we can consider the bond reserve for retain earning but not in 2015. therefore, answer is B.
Friso The question is: what part of Retained Earnings on the BALANCE SHEET should be marked? That is the 1,200,000.
The 250,000 is no longer marked and the bond retirement is marked on the asset side, it's a part of cash, not a part of retained earnings. rocku's reply is incorrect.
cbracho54 This question considers retained earnings and appropriated retained earnings to be two different accounts. And the 250k saved from the first project went back to retained earnings.

The descriptions are usually in the notes.
chesschh RE and appropriated RE are different
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