In accordance with restrictive debt covenants, Maynard Company appropriated $20,000 of retained earnings. How would the appropriation affect the financial statements?

Question

Quizplus · Accepted Answer

In accordance with restrictive debt covenants, the company has "appropriated" (set aside) a portion of its retained earnings, but has not actually spent or distributed the funds. This means that the retained earnings account will decrease by $20,000, but a new account for appropriated retained earnings will increase by the same amount. Therefore, choice A is the correct answer. Choice B is incorrect because it suggests that the appropriated earnings will be added to the current retained earnings, which is not the case. Choice C is also incorrect because there is no mention of a cash transaction involved. Choice D is unlikely because any appropriation of retained earnings would require an entry to be made.

In Accordance with Restrictive Debt Covenants, Maynard Company Appropriated $20,000