Question

Minor Corporation purchases 5,000 shares of its $4 par common stock at $7 per share and also has an outstanding loan of $100,000.
Under the provisions of the contract of the loan, Minor is required to maintain 25% of the balance of the loan in retained earnings at
all times. What is the current minimum retained earnings restriction for the company?
O $40,000
O $45,000
O $60,000
O $0

Answer 1

The current minimum retained earnings restriction for the company is $60,000

Restriction of retained earnings for Loan = Outstanding loan *  % of maintained balance

Restriction of retained earnings for Loan = $100,000 * 25%

Restriction of retained earnings for Loan = $25,000

Restriction of retained earnings for treasury Stock = Purchased shares * $7 per share

Restriction of retained earnings for treasury Stock = 5000 shares * $7

Restriction of retained earnings for treasury Stock = $35,000

Current Minimum retained earnings restriction = Restriction of retained earnings for Loan + Restriction of retained earnings for treasury Stock

Current Minimum retained earnings restriction = $25,000 + $35,000

Current Minimum retained earnings restriction = $60,000

Therefore, the Option C is correct because current minimum retained earnings restriction for the company is $60,000

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