If a corporation keeps too much retained earnings, the excess may be subject to a special corporate income tax. If retained earnings exceed this amount, the corporation must file a form 1120-F with IRS; this form reconciles the excess retained earnings.

Is there a limit on retained earnings?

Limit on Retained Earnings For service-related businesses in accounting, engineering, health, law or architecture, the standard falls to $150,000. If your company’s retained earnings surpass the limit, you must show a bona fide business purpose for the excess.

Is the 20 million retained earnings held as cash?

Explain your answer. No, because the $20 million of retained earnings would probably not be held as cash. The retained earnings figure represents the reinvestment of earnings by the firm over its life. Consequently, the $20 million would be an investment in all of the firm’s assets

Can a company declare a dividend on retained earnings?

If a “typical” firm reports $20 million of retained earnings on its balance sheet, could its directors declare a $20 million cash dividend without having any qualms about what they were doing? Explain your answer. No, because the $20 million of retained earnings would probably not be held as cash.

What does$ 20 million mean on the balance sheet?

Consequently, the $20 million would be an investment in all of the firm’s assets While the balance sheet can be thought of as a snapshot of a firm’s financial position at a point in time, the income statement reports on operations over a period of time.

Why are there different ways to report earnings?

Some variations may stem from legitimate differences of opinion about the correct way to record transactions. In other cases, managers may choose to report numbers in a way that helps them present either higher earnings or more stable earnings over time.