Topic: Profit appropriation Level of difficulty: Moderate As of 1 January X1, Menotti’s capital comprised 4,000 shares of 100 CU par. These shares are divided in two classes: 1,000 class-A shares and...

Topic: Profit appropriation Level of difficulty: Moderate As of 1 January X1, Menotti’s capital comprised 4,000 shares of 100 CU par. These shares are divided in two classes: 1,000 class-A shares and 3,000 class-B shares. Class-A shares enjoy a five percent of par preference dividend over and above the ordinary dividends. Before appropriation of the annual earnings, the books show the following year-end data (in CU). Capital 400,000 Legal reserve 39,000 Regulated reserves 8,000 Losses brought forward 5,000 Net income after tax (year ending 31/12/X0) 40,000 Tax regulations require that the regulated reserve be incremented by 2,000 CU in X1. The by-laws contain the following stipulations: n Each year the legal reserve must be incremented by an amount of 5 percent of the net income for the year net of any loss carry-forward (if the net is positive) as long as the legal reserve is less than ten percent of the par capital. n Class-A shares must receive a preference dividend of 5 percent of their par value. n All A and B shares are equally entitled to the payment of ordinary dividends. The board of directors proposes that (a) an optional reserve be created for an amount of 10,000 CU and (b) that an ordinary dividend of four CU per share be paid out. The general assembly approves these propositions. The balance of income after appropriation will be carried forward. Required 1 Prepare a table detailing the profit appropriation calculations (including the per share dividend for each class of shares). 2 Prepare the appropriation accounting entries. 3 Prepare a table detailing the shareholders’ equity and liabilities before and after appropriation.