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Restrictions Pemberton Company has a retained earnings balance of $400,000 at the end of 2016. During...

Restrictions Pemberton Company has a retained earnings balance of $400,000 at the end of 2016. During 2016, it had issued $100,000 of 5-year, 12%, long-term bonds. The bond provisions require that each year over the 5-year period an additional $20,000 of retained earnings be unavailable for dividends. This restriction is in addition to any other retained earnings restrictions that the company might make. At the end of 2016, Pemberton held treasury stock costing $15,000. Required: Show how Pemberton would report its retained earnings in its 2016 financial statements. Include a note to the financial statements fully describing the restrictions.

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Answer #1
Calculation of Retained Eraning year end balance
Retained Eraning balance, 2016 $400,000
Less: Restrictions
Treasury stock $15,000
Interest on long term loan (100000*12%) 12000
$373,000
Add: additions to Retained earnings 20000
Ending Balance of Retained Earnings $393,000
Note:
$100,000 of 5-year, 12%, long-term bonds were issued
$20000 each year for 5 years will be unavailable for
paying off dividend and will be used to repay long term bonds
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