Chapter 14-1. Chapter 14-2 Chapter 14 Accounting Principles, Ninth Edition Corporations: Dividends,...

Chapter 14-1

Chapter 14-2

Chapter 14

Accounting Principles, Ninth Edition

Corporations: Dividends, Retained

Earnings, and Income Reporting

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

DividendsDividendsDividendsDividends

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 PresentationEquity Presentation

Stockholders’ Stockholders’ Equity AnalysisEquity Analysis

Income Statement Income Statement PresentationPresentation

Income Statement Income Statement AnalysisAnalysis

Retained Retained

EarningsEarnings

Retained Retained

EarningsEarnings

Statement Statement

Presentation and Presentation and

AnalysisAnalysis

Statement Statement

Presentation and Presentation and

AnalysisAnalysis

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

Chapter 14-5

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

Types of Dividends:


SO 1 Prepare the entries for cash dividends and stock SO 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. 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: 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 50,000

Dividends payable 50,000

December 22 (Date of Record)January 20 (Payment Date)



Dividends payable 50,000Cash 50,000

No entry

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



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 6,000

Dividends payable

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

Chapter 14-11



2010 2011

Dividends declared 6,000$

Dividends in arrears

Allocation to pref erred 6,000

Remainder to common -$

* 1,000 shares x $100 par x 8% = $8,000

*

** 2010 Pfd. dividends $8,000 – declared $6,000 = $2,000

**

Illustration: At December 31, 2011, IBR declares a $50,000 cash dividend. Show the allocation of dividends to each class of stock.

$ 50,0002,000

8,000

$ 40,000

Chapter 14-12



Retained earnings 50,000

Dividends payable

50,000

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

Chapter 14-13

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) 20,000

Common stock dividends distributable 500Additional 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

S tockholders' equityP aid-in capita l

C ommon stock, $1 par, 5 ,000 issuedand outstanding 5,000$

C om m on stock d ividends d istributab le 500 P aid-in capita l in excess of par 64,500

Reta ined earnings 90,000 Total stockholders' equity 160,000$

H H Inc.B alance S heet (partia l)

Stockholders’ Equity with Dividends Distributable



Chapter 14-19

HH Inc. Before After NetDividend Dividend Change

Stockholders' equityPaid-in capital

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. current liability.

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

Chapter 14-25

HH Inc. Before After NetSplit Split Change

Stockholders' equityPaid-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$



Effects of Stock Splits

Chapter 14-26

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

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

Chapter 14-27

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 14-28

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

Prior Period AdjustmentsPrior Period AdjustmentsPrior Period AdjustmentsPrior Period Adjustments


Chapter 14-29

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?

Prior Period AdjustmentsPrior Period AdjustmentsPrior Period AdjustmentsPrior Period Adjustments


Chapter 14-30

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$

Retained Earnings StatementRetained Earnings StatementRetained Earnings StatementRetained Earnings Statement


Chapter 14-31



The company prepares the statement from the Retained Earnings account.

Illustration 14-13

Chapter 14-32

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 14-33 SO 3 Prepare and analyze a comprehensive stockholders’ equity

section.

Statement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and PresentationStatement Analysis and Presentation

Illustration 14-15

Chapter 14-34

Stockholders’ Equity Analysis

Net Income Available to Common Stockholders

Return on Common

Stockholders’ Equity

= Average Common

Stockholders’ Equity

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


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

Chapter 14-35

Income Statement Presentation

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


Illustration 14-17

Chapter 14-36

Income Statement Analysis

Net Income minus Preferred DividendsEarnings

Per Share

= Weighted-Average Common Shares Outstanding

SO 5 Compute Earnings Per Share.


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

Chapter 14-37

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)

SO 5 Compute Earnings Per Share.


Chapter 14-38

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Chapter 14-1. Chapter 14-2 Chapter 14 Accounting Principles, Ninth Edition Corporations: Dividends,...

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