Retained earnings are occasionally restricted
A) to set aside cash for dividends.
B) to keep the legal capital associated with paid-in capital intact.
C) due to contractual loan restrictions.
D) if preferred dividends are in arrears.

Question

Quizplus · Accepted Answer

Retained earnings may be restricted due to contractual loan restrictions, such as debt covenants that require the company to maintain a certain level of earnings and cash flow to meet debt service requirements. This may limit the amount of retained earnings available for other purposes such as dividends or capital expenditures.

Retained Earnings Are Occasionally Restricted