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14
Corporations:
Dividends, Retained
Earnings, and Income
Reporting
Chapter
14-1
Study
Study Objectives
Objectives
1.
2.
3.
4.
5.
Chapter
14-2
Corporations:
Corporations: Dividends,
Dividends, Retained
Retained Earnings,
Earnings,
and
and Income
Income Reporting
Reporting
Dividends
Cash dividends
Stock dividends
Stock splits
Chapter
14-3
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
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
Dividends
Dividends require information concerning three dates:
Chapter
14-5
Dividends
Dividends
Cash Dividends
For a corporation to pay a cash dividend, it must have:
Chapter
14-6
1.
2.
Adequate cash.
3.
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
Dividends payable
March 25 (Date of Record)
50,000
50,000
No entry
50,000
50,000
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
14-8
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
14-9
Dividends
Dividends
Exercise: (a) Show the allocation of dividends to each
class of stock, assuming the preferred stock dividend is
8% and not cumulative.
Chapter
14-10
Dividends
Dividends
Exercise: (b) Show the allocation of dividends to each
class of stock, assuming the preferred stock dividend is
9% and cumulative.
**
Dividends
Dividends
Exercise: (c) Journalize the declaration of the cash
dividend at December 31, 2012, under part (b).
Journal entry:
Retained earnings
Dividends payable
Chapter
14-12
28,000
28,000
Chapter
14-13
Dividends
Dividends
Stock Dividends
Illustration 14-3
Dividends
Dividends
Stock Dividends
Reasons why corporations issue stock dividends:
1.
2.
3.
Chapter
14-15
Dividends
Dividends
Size of Stock Dividends
Small stock dividend (less than 2025% of the
corporations issued stock, recorded at fair
market value) *
Large stock dividend (greater than 2025% 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
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)
Chapter
14-17
500
500
Dividends
Dividends
Stockholders Equity with Dividends Distributable
Chapter
14-18
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
Chapter
14-19
5,000
45,000
110,000
$ 160,000
$
5,000
32
After
Dividend
5,500
64,500
90,000
$ 160,000
$
Net
Change
$ 500
19,500
(20,000)
5,500
29
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
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
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
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
Chapter
14-23
Chapter
14-24
Dividends
Dividends
Effects of Stock Splits
HH Inc.
Before
Split
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
Chapter
14-25
5,000
45,000
110,000
$ 160,000
$
5,000
32
After
Split
5,000
45,000
110,000
$ 160,000
Net
Change
10,000
$
16
Retained
Retained Earnings
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
Retained
Retained Earnings
Earnings Restrictions
Restrictions
Restrictions can result from:
1.
Legal restrictions.
2.
Contractual restrictions.
3.
Voluntary restrictions.
Chapter
14-27
Prior
Prior Period
Period Adjustments
Adjustments
Corrections of Errors
Result from:
mathematical mistakes
mistakes in application of accounting principles
oversight or misuse of facts
Chapter
14-28
Prior
Prior Period
Period Adjustments
Adjustments
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
Retained
Retained Earnings
Earnings Statement
Statement
Chapter
14-30
Retained
Retained Earnings
Earnings Statement
Statement
The company prepares the statement from the
Retained Earnings account.
Illustration 14-13
Chapter
14-31
Retained
Retained Earnings
Earnings Statement
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
Statement
Statement Analysis
Analysis and
and Presentation
Presentation
Illustration 14-15
Chapter
14-33
Statement
Statement Analysis
Analysis and
and Presentation
Presentation
Stockholders Equity Analysis
Return on
Common
Stockholders
Equity
Statement
Statement Analysis
Analysis and
and Presentation
Presentation
Income
Statement
Presentation
Chapter
14-35
Illustration 14-17
Statement
Statement Analysis
Analysis and
and Presentation
Presentation
Income Statement Analysis
Earnings
Per Share
Chapter
14-36
Statement
Statement Analysis
Analysis and
and Presentation
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.
d. No correct answer is given.
Chapter
14-37
Copyright
Copyright
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information contained herein.
Chapter
14-38