How do you appropriate retained earnings?
The most common way to report an appropriation of retained earnings is by disclosing the matter in the notes to the financial statements. The note would include the amount and reason for the appropriation as well as applicable dates if available.
The following example is taken from the Notes to the Financial Statement of Tektronix, Inc.:
Certain of the Company's debt agreements require compliance with debt covenants. Management believes that the Company is in compliance with such requirements for the fiscal year ended may 26, 2001. The Company has unrestricted retained earnings of $223.8 million after meeting those requirements.
A lesser-used way to record the restriction is to make the following journal entry for the amount of the appropriation:
Dr Retained Earnings
.....Cr Appropriated Retained Earnings.
Both accounts are reflected on the Balance Sheet and in the Statement of Retained Earnings. When the appropriation is no longer needed it is reversed.
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References: Kimmel, Paul D., Jerry J. Weygandt, and Donald E. Kieso. Financial Accounting: Tools for Business Decision Making. New York, NY: Wiley, 2008. Print.