Chapter 14-1

Chapter 14-2

Chapter

14

Corporations: Dividends, Retained Earnings, and Income Reporting

Accounting Principles, Ninth Edition

Study Objectives

1.

2.

3.

4.

5.

Prepare the entries for cash dividends and stock dividends.

Identify the items reported in a retained earnings statement.

Prepare and analyze a comprehensive stockholders’ equity section. Describe the form and content of corporation income statements.

Compute earnings per share.

Chapter 14-3

Chapter 14-4

Corporations: Dividends, Retained Earnings, and Income Reporting

Dividends

Cash dividends Stock dividends Stock splits

Retained Earnings

Retained earnings restrictions Prior period adjustments Retained earnings statement

Statement Presentation and Analysis

Stockholders’ Equity Presentation Stockholders’ Equity Analysis Income Statement Presentation Income Statement Analysis

Dividends

A distribution of cash or stock to stockholders on a pro rata (proportional) basis. Types of Dividends: 1.

2.

Cash dividends.

Property dividends.

3.

Stock dividends.

Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share.

Chapter 14-5

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Dividends require information concerning three dates:

Chapter 14-6

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Cash Dividends

For a corporation to pay a cash dividend, it must have: 1. Retained earnings - Payment of cash dividends from retained earnings is legal in all states.

2. Adequate cash.

3. A declaration of dividends by the Board of Directors.

Chapter 14-7

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Illustration:

On Dec. 1, the directors of Media General declare a 50¢ per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on Jan. 20 to shareholders of record on Dec. 22?

December 1 (Declaration Date)

Retained earnings Dividends payable 50,000 50,000

December 22 (Date of Record) No entry January 20 (Payment Date)

Dividends payable Cash

Chapter 14-8

50,000 50,000

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Allocating Cash Dividends Between Preferred and Common Stock

Holders of

cumulative

preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends.

Chapter 14-9

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Illustration:

On December 31, 2010, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock. It also has 50,000 shares of $10 par value common stock outstanding. At December 31, 2010, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend.

Retained earnings Dividends payable 6,000 6,000 Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000

Chapter 14-10

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Illustration:

cash dividend. Show the allocation of dividends to each class of stock.

At December 31, 2011, IBR declares a $50,000 Dividends declared Dividends in arrears Allocation to preferred Remainder to common 2010 $ 6,000 6,000 $ 2011 $ 50,000 2,000 8,000 $ 40,000 ** * * 1,000 shares x $100 par x 8% = $8,000 ** 2010 Pfd. dividends $8,000 – declared $6,000 = $2,000

Chapter 14-11

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Illustration:

At December 31, 2011, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend .

Retained earnings Dividends payable 50,000 50,000

Chapter 14-12

SO 1 Prepare the entries for cash dividends and stock dividends.

Chapter 14-13

Dividends

Stock Dividends Illustration 14-3

Pro rata distribution of the corporation’s own stock.

Results in decrease in retained earnings and increase in paid-in capital.

Chapter 14-14

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Stock Dividends

Reasons why corporations issue stock dividends: 1. To satisfy stockholders’ dividend expectations without spending cash.

2. To increase the marketability of the corporation’s stock. 3. To emphasize that a portion of stockholders’ equity has been permanently reinvested in the business.

Chapter 14-15

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Size of Stock Dividends Small stock dividend

(less than 20–25% of the corporation’s issued stock, recorded at fair market value) *

Large stock dividend

(greater than 20–25% of issued stock, recorded at par value) * This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares.

Chapter 14-16

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Illustration:

HH Inc. has 5,000 shares issued and outstanding. The per share par value is $1, book value $32 and market value is $40.

10% stock dividend is declared

Retained earnings (5,000 x 10% x $40) Common stock dividends distributable Additional paid-in capital 20,000 500 19,500

Stock issued

Common stock div. distributable Common stock (5,000 x 10% x $1) 500 500

Chapter 14-17

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Stockholders’ Equity with Dividends Distributable

HH Inc.

Balance Sheet (partial)

Stockholders' equity

Paid-in capital Common stock, $1 par, 5,000 issued and outstanding

Common stock dividends distributable

Paid-in capital in excess of par Retained earnings

Total stockholders' equity

$ 5,000

500

64,500 90,000 $ 160,000

Chapter 14-18

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Effects of Stock Dividends

HH Inc.

Before Dividend

Stockholders' equity

Paid-in capital Common stock, $1 par, 5,000 issued and outstanding Paid-in capital in excess of par Retained earnings

Total stockholders' equity

Outstanding shares Book value per share $ 5,000 45,000 110,000 $ 160,000 5,000 $ 32 After Dividend Net Change $ 5,500 64,500 90,000 $ 160,000 5,500 $ 29 $ 500 19,500 (20,000)

$ 0 Chapter 14-19

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Question

Which of the following statements about small stock dividends is true?

a. A debit to Retained Earnings for the par value of the shares issued should be made.

b. A small stock dividend decreases total stockholders’ equity. c. Market value per share should be assigned to the dividend shares. d. A small stock dividend ordinarily will have no effect on book value per share of stock.

Chapter 14-20

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Question

In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n): a. deduction from total paid-in capital and retained earnings. b. current liability.

c. deduction from retained earnings.

d. addition to capital stock.

Chapter 14-21

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Stock Split

Reduces the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number of shares.

Chapter 14-22

SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

Illustration:

HH Inc. has 5,000 shares issued and outstanding. The per share par value is $1, book value $32 and market value is $40.

2 for 1 Stock Split

No Entry -- Disclosure that par is now $.50 and shares outstanding are 10,000.

Chapter 14-23

SO 1 Prepare the entries for cash dividends and stock dividends.

Chapter 14-24

Dividends

Effects of Stock Splits

HH Inc.

Stockholders' equity

Paid-in capital Common stock Paid-in capital in excess of par Retained earnings

Total stockholders' equity

Outstanding shares Book value per share Before Split After Split Net Change $ 5,000 45,000 110,000 $ 160,000

5,000

$ 32 $ 5,000 45,000 110,000 $ 160,000

10,000

$ 16 $ $ -

Chapter 14-25

SO 1 Prepare the entries for cash dividends and stock dividends.

Retained Earnings

Retained earnings

is net income that a company retains for use in the business.

Net income increases Retained Earnings and a net loss decreases Retained Earnings.

Retained earnings is part of the stockholders’ claim on the total assets of the corporation.

A debit balance in Retained Earnings is identified as a

deficit

.

Chapter 14-26

SO 2 Identify the items reported in a retained earnings statement.

Retained Earnings Restrictions

Restrictions can result from: 1. Legal restrictions.

2. Contractual restrictions.

3. Voluntary restrictions.

Companies generally disclose retained earnings restrictions in the notes to the financial statements.

Chapter 14-27

SO 2 Identify the items reported in a retained earnings statement.

Prior Period Adjustments

Corrections of Errors

Result from:    mathematical mistakes mistakes in application of accounting principles oversight or misuse of facts Corrections treated as

prior period adjustments

Adjustment made to the beginning balance of retained earnings

Chapter 14-28

SO 2 Identify the items reported in a retained earnings statement.

Prior Period Adjustments

Woods, Inc.

Statement of Retained Earnings For the Year Ended December 31, 2010 Balance, January 1 Net income Dividends Balance, December 31 $ 1,050,000 $ 360,000 (300,000) 1,110,000 Before issuing the report for the year ended December 31, 2010, you discover a $50,000 error (net of tax) that caused the 2009 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2009. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2010?

Chapter 14-29

SO 2 Identify the items reported in a retained earnings statement.

Retained Earnings Statement

Woods, Inc.

Statement of Retained Earnings For the Year Ended December 31, 2010 Balance, January 1, as previously reported Prior period adjustment - error correction Balance, January 1, as restated Net income Dividends Balance, December 31 $ 1,050,000 $ (50,000) 1,000,000 360,000 (300,000) 1,060,000

Chapter 14-30

SO 2 Identify the items reported in a retained earnings statement.

Retained Earnings Statement

The company prepares the statement from the Retained Earnings account.

Illustration 14-13 Chapter 14-31

SO 2 Identify the items reported in a retained earnings statement.

Retained Earnings Statement

Question

All but one of the following is reported in a retained earnings statement. The exception is: a. cash and stock dividends.

b. net income and net loss.

c. some disposals of treasury stock below cost.

d. sales of treasury stock above cost.

Chapter 14-32

SO 2 Identify the items reported in a retained earnings statement.

Statement Analysis and Presentation

Illustration 14-15 Chapter 14-33

SO 3 Prepare and analyze a comprehensive stockholders’ equity section.

Statement Analysis and Presentation

Stockholders’ Equity Analysis

Return on Common Stockholders’ Equity

= Net Income Available to Common Stockholders Average Common Stockholders’ Equity This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders.

Chapter 14-34

SO 3 Prepare and analyze a comprehensive stockholders’ equity section.

Statement Analysis and Presentation

Income Statement Presentation

Illustration 14-17 Chapter 14-35

SO 4 Describe the form and content of corporation income statements.

Statement Analysis and Presentation

Income Statement Analysis

Earnings Per Share

= Net Income minus Preferred Dividends Weighted-Average Common Shares Outstanding This ratio indicates the net income earned by each share of outstanding

common stock

.

Chapter 14-36

SO 5 Compute Earnings Per Share.

Statement Analysis and Presentation

Question

The income statement for Nadeen, Inc. shows income before income taxes $700,000, income tax expense $210,000, and net income $490,000. If Nadeen has 100,000 shares of common stock outstanding throughout the year, earnings per share is: a. $7.00.

b. $4.90. c. $2.10.

($490,000 / 100,000 = $4.90)

d. No correct answer is given.

Chapter 14-37

SO 5 Compute Earnings Per Share.

Chapter 14-38

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