chapter 14-1. chapter 14-2 chapter 14 corporations: dividends, retained earnings, and income...

Chapter 14-1

Chapter 14-2

CHAPTER CHAPTER 1414CHAPTER CHAPTER 1414

CORPORATIONS: DIVIDENDS, RETAINED

EARNINGS, AND INCOME REPORTING

CORPORATIONS: DIVIDENDS, RETAINED

EARNINGS, AND INCOME REPORTING

Accounting Principles, Eighth Edition

Chapter 14-3

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.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 14-4

Corporations: Dividends, Retained Corporations: Dividends, Retained Earnings, and Income ReportingEarnings, and Income Reporting

Corporations: Dividends, Retained Corporations: Dividends, Retained Earnings, and Income ReportingEarnings, and Income Reporting

DividendsDividendsDividendsDividendsRetained Retained

EarningsEarningsRetained Retained

EarningsEarnings

Statement Statement

Presentation and Presentation and

AnalysisAnalysis

Statement Statement

Presentation and Presentation and

AnalysisAnalysis

Cash dividendsCash dividends

Stock dividendsStock dividends

Stock splitsStock splits

Retained earnings Retained earnings restrictionsrestrictions

Prior period Prior period adjustmentsadjustments

Retained earnings Retained earnings statementstatement

Stockholders’ Stockholders’ Equity Equity PresentationPresentation

Stockholders’ Stockholders’ Equity AnalysisEquity Analysis

Income Statement Income Statement PresentationPresentation

Income Statement Income Statement AnalysisAnalysis

Chapter 14-5

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

Types of Dividends:

DividendsDividendsDividendsDividends

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

1. Cash dividends.

2. Property dividends.

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

3. Script (promissory note).

4. Stock dividends.

Chapter 14-6

Dividends require information concerning three dates:



Chapter 14-7

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 14-8

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 50,000Dividends payable 50,000

March 25 (Date of Record) No entry

April 6 (Payment Date)



Dividends payable 50,000Cash 50,000

Chapter 14-9

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 14-10

ExerciseExercise Arnez Corporation was organized on January 1, 2007. 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: 2007, $6,000, 2008, $12,000, and 2009, $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 14-11

ExerciseExercise (a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and not cumulative.



2007 2008 2009

Dividends declared 6,000$ 12,000$ 28,000$

Allocation to pref erred 6,000 8,000 8,000

Remainder to common -$ 4,000$ 20,000$

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

*

Chapter 14-12

ExerciseExercise (b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 9% and cumulative.



2007 2008 2009


Dividends in arrears 3,000


Remainder to common -$ -$ 19,000$

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

*

** 2007 Pfd. dividends $9,000 – declared $6,000 = $3,000

**

Chapter 14-13

ExerciseExercise (c) Journalize the declaration of the cash dividend at December 31, 2009, under part (b).



Retained earnings 28,000

Dividends payable

28,000

2007 2008 2009


Dividends in arrears 3,000


Remainder to common -$ -$ 19,000$

Journal entry:

Chapter 14-14

Stock Dividends

Pro rata distribution of the corporation’s own stock.



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

Illustration 14-3

Chapter 14-15

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

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

10% stock dividend is declaredRetained earnings (5,000 x 10% x $40)

20,000Common stock dividends

distributable500

Additional paid-in capital 19,500

Stock issued

Common stock div. distributable

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

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.



Chapter 14-18

Stockholders' equityPaid-in capital

Common stock, $1 par, 5,000 issuedand outstanding 5,000$

Common stock dividends distributable 500 Paid-in capital in excess of par 64,500

Retained earnings 90,000 Total stockholders' equity 160,000$

HH Inc.Balance Sheet (partial)

Stockholders’ Equity with Dividends Distributable



Chapter 14-19

HH Inc. Before After NetDividend Dividend Change


Common stock, $1 par, 5,000 issuedand outstanding 5,000$ 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$

Outstanding shares 5,000 5,500 Book value per share 32$ 29$



Effects of Stock Dividends

$ 0

Chapter 14-20

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.

QuestionQuestion



Chapter 14-21

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. addition to additional paid-in capital.

c. deduction from retained earnings.

d. addition to capital stock.

QuestionQuestion



Chapter 14-22

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

2 for 1 Stock Split

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

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.



Chapter 14-24

HH Inc. Before After NetSplit Split Change


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$



Effects of Stock Dividends

Chapter 14-25

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.

Retained EarningsRetained EarningsRetained EarningsRetained Earnings

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

Chapter 14-26

Restrictions can result from:

1. Legal restrictions.

2. Contractual restrictions.

3. Voluntary restrictions.

Retained Earnings RestrictionsRetained Earnings RestrictionsRetained Earnings RestrictionsRetained Earnings Restrictions


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

Chapter 14-27

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 to the beginning balance of retained earnings

Prior Period AdjustmentsPrior Period AdjustmentsPrior Period AdjustmentsPrior Period Adjustments


Chapter 14-28

Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2007

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, 2007, you discover a $50,000 error (net of tax) that caused the 2006 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2006). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2007?

Prior Period AdjustmentsPrior Period AdjustmentsPrior Period AdjustmentsPrior Period Adjustments


Chapter 14-29

Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2007

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$

Retained Earnings StatementRetained Earnings StatementRetained Earnings StatementRetained Earnings Statement


Chapter 14-30



The company prepares the statement from the Retained Earnings account.

Illustration 14-13

Chapter 14-31

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.

QuestionQuestion



Chapter 14-32 LO 3 Prepare and analyze a comprehensive stockholders’ equity

section.

Statement Analysis and Statement Analysis and PresentationPresentationStatement Analysis and Statement Analysis and PresentationPresentation Illustration 14-15

Chapter 14-33

Stockholders’ Equity Analysis

Net Income Available to Common Stockholders

Return on Common

Stockholders’ Equity

= Average Common

Stockholders’ Equity

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

Statement Analysis and Statement Analysis and PresentationPresentationStatement Analysis and Statement Analysis and PresentationPresentation

This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders.

Chapter 14-34

Income Statement Presentation

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


Illustration 14-17

Chapter 14-35

Income Statement Analysis

Net Income minus Preferred DividendsEarnings

Per Share

= Weighted-Average Common Shares Outstanding

LO 5 Compute Earnings Per Share.


This ratio indicates the net income earned by each share of outstanding common stock.

Chapter 14-36

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.

QuestionQuestion

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

LO 5 Compute Earnings Per Share.


Chapter 14-37

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