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Chapter

14-1
Chapter 14
Corporations:
Dividends, Retained
Earnings, and Income
Reporting
Chapter
14-2 Accounting Principles, Ninth Edition
Study Objectives

1. Prepare the entries for cash dividends and stock


dividends.
2. Identify the items reported in a retained earnings
statement.
3. Prepare and analyze a comprehensive stockholders’
equity section.
4. Describe the form and content of corporation
income statements.
5. Compute earnings per share.

Chapter
14-3
Corporations: Dividends, Retained Earnings,
and Income Reporting

Statement
Retained
Dividends Presentation and
Earnings
Analysis

Cash dividends Retained earnings Stockholders’


Stock dividends restrictions Equity Presentation
Stock splits Prior period Stockholders’
adjustments Equity Analysis
Retained earnings Income Statement
statement Presentation
Income Statement
Analysis

Chapter
14-4
Dividends

A distribution of cash or stock to stockholders


on a pro rata (proportional) basis.

Types of Dividends:
1. Cash dividends. 3. Stock dividends.
2. Property 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: What would be the journal entries made by
a corporation that declared a $50,000 cash dividend on
March 10, payable on April 6 to shareholders of record on
March 25?
March 10 (Declaration Date)
Retained earnings 50,000
Dividends payable 50,000

March 25 (Date of Record) No entry

April 6 (Payment Date)


Dividends payable 50,000
Cash 50,000
Chapter
14-8 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

Exercise: Arnez Corporation was organized on January 1,


2010. During its first year, the corporation issued 2,000
shares of $50 par value preferred stock and 100,000
shares of $10 par value common stock. At December 31,
the company declared the following cash dividends: 2010,
$6,000, 2011, $12,000, and 2012, $28,000.

Instructions: (a) Show the allocation of dividends to each


class of stock, assuming the preferred stock dividend is
8% and not cumulative.

Chapter
14-10 SO 1 Prepare the entries for cash dividends and stock dividends.
Dividends

Exercise: (a) Show the allocation of dividends to each


class of stock, assuming the preferred stock dividend is
8% and not cumulative.

2010 2011 2012


Dividends declared $ 6,000 $ 12,000 $ 28,000
Allocation to preferred 6,000 8,000 8,000
*
Remainder to common $ - $ 4,000 $ 20,000

* 2,000 shares x $50 par x 8% = $8,000

Chapter
14-11 SO 1 Prepare the entries for cash dividends and stock dividends.
Dividends

Exercise: (b) Show the allocation of dividends to each


class of stock, assuming the preferred stock dividend is
9% and cumulative.

2010 2011 2012


Dividends declared $ 6,000 $ 12,000 $ 28,000
Dividends in arrears 3,000
**
Allocation to preferred * 6,000 9,000 9,000
Remainder to common $ - $ - $ 19,000

* 2,000 shares x $50 par x 9% = $9,000


** 2008 Pfd. dividends $9,000 – declared $6,000 = $3,000
Chapter
14-12 SO 1 Prepare the entries for cash dividends and stock dividends.
Dividends

Exercise: (c) Journalize the declaration of the cash


dividend at December 31, 2012, under part (b).

2010 2011 2012


Dividends declared $ 6,000 $ 12,000 $ 28,000
Dividends in arrears 3,000
Allocation to preferred 6,000 9,000 9,000
Remainder to common $ - $ - $ 19,000

Journal entry:
Retained earnings 28,000
Dividends payable 28,000
Chapter
14-13 SO 1 Prepare the entries for cash dividends and stock dividends.
Chapter
14-14
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
14-15 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
14-16 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
14-17 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) 20,000
Common stock dividends distributable 500
Additional paid-in capital 19,500

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

Chapter
14-18 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 $ 5,000
Common stock dividends distributable 500
Paid-in capital in excess of par 64,500
Retained earnings 90,000
Total stockholders' equity $ 160,000

Chapter
14-19 SO 1 Prepare the entries for cash dividends and stock dividends.
Dividends

Effects of Stock Dividends


HH Inc. Before After Net
Dividend Dividend Change
Stockholders' equity
Paid-in capital
Common stock, $1 par, 5,000 issued
and outstanding $ 5,000 $ 5,500 $ 500
Paid-in capital in excess of par 45,000 64,500 19,500
Retained earnings 110,000 90,000 (20,000)
Total stockholders' equity $ 160,000 $ 160,000 $ 0
Outstanding shares 5,000 5,500
Book value per share $ 32 $ 29

Chapter
14-20 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
14-21 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
14-22 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
14-23 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
14-24 SO 1 Prepare the entries for cash dividends and stock dividends.
Chapter
14-25
Dividends

Effects of Stock Splits


HH Inc. Before After Net
Split Split Change
Stockholders' equity
Paid-in capital
Common stock $ 5,000 $ 5,000 $ -
Paid-in capital in excess of par 45,000 45,000 -
Retained earnings 110,000 110,000 -
Total stockholders' equity $ 160,000 $ 160,000 $ -

Outstanding shares 5,000 10,000


Book value per share $ 32 $ 16

Chapter
14-26 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
14-27 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
14-28 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
14-29 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 $ 1,050,000


Net income 360,000
Dividends (300,000)
Balance, December 31 $ 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
14-30 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 $ 1,050,000


Prior period adjustment - error correction (50,000)
Balance, January 1, as restated 1,000,000
Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,060,000

Chapter
14-31 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
14-32 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
14-33 SO 2 Identify the items reported in a retained earnings statement.
Statement Analysis and Presentation
Illustration 14-15

Chapter
14-34 SO 3 Prepare and analyze a comprehensive stockholders’ equity section.
Statement Analysis and Presentation

Stockholders’ Equity Analysis

Return on Net Income Available


Common to Common Stockholders
=
Stockholders’ Average Common
Equity Stockholders’ Equity

This ratio shows how many dollars of net income the


company earned for each dollar invested by the
stockholders.

Chapter
14-35 SO 3 Prepare and analyze a comprehensive stockholders’ equity section.
Statement Analysis and Presentation

Income Illustration 14-17

Statement
Presentation

Chapter
14-36 SO 4 Describe the form and content of corporation income statements.
Statement Analysis and Presentation

Income Statement Analysis

Net Income minus


Earnings Preferred Dividends
=
Per Share
Weighted-Average Common
Shares Outstanding

This ratio indicates the net income earned by each


share of outstanding common stock.

Chapter
14-37 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. ($490,000 / 100,000 = $4.90)

c. $2.10.
d. No correct answer is given.

Chapter
14-38 SO 5 Compute Earnings Per Share.
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Chapter
14-39