Wey AP 8e Ch14
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Transcript of Wey AP 8e Ch14
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Chapter14-1
CHAPTER 14
Additional Issues
in Accounting forCorporations
Accounting Principles, Eighth Edition
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Chapter14-2
1. Prepare the entries for cash dividends and stockdividends.
2. Identify the items reported in a retained earningsstatement.
3. Prepare and analyze a comprehensivestockholders equity section.
4. Describe the form and content of corporation
income statements.5. Compute earnings per share.
Study Objectives
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Chapter14-3
Corporations: Dividends, RetainedEarnings, and Income Reporting
DividendsRetained
Earnings
Statement
Presentation and
Analysis
Cash dividends
Stock dividends
Stock splits
Retained earnings
restrictions
Prior period
adjustments
Retained earnings
statement
Stockholders
Equity
Presentation
Stockholders
Equity Analysis
Income Statement
Presentation
Income Statement
Analysis
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Chapter14-4
A distribution of cash or stock to stockholderson a pro rata (proportional) basis.
Types of Dividends:
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
1. Cash dividends.
2. Property dividends.
Dividends expressed: (1) as a percentage of the par orstated value, or (2) as a dollar amount per share.
3. Script (promissory note).
4. Stock dividends.
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Chapter14-5
Dividends require information concerning three dates:
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter14-6
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 dividendsby the Board of
Directors.
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter14-7
Illustration: What would be the journal entriesmade by a corporation that declared a $50,000 cashdividend on March 10, payable on April 6 toshareholders of record on March 25?
March 10 (Declaration Date)
Cash Dividien 50,000Dividends payable 50,000
March 25 (Date of Record) No entry
April 6 (Payment Date)
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends payable 50,000Cash 50,000
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Chapter14-8
Allocating Cash Dividends BetweenPreferred and Ordinary Shares
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
Holders of cumulativePreference Share mustbe paid any unpaid prior-year dividends beforeOrdinary Sharesholders receive dividends.
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Chapter14-9
Exercise Arnez Corporation was organized on January1, 2007. During its first year, the corporation issued
2,000 shares of $50 par value preferrence shares and
100,000 shares of $10 par value ordinary shares. At
December 31, the company declared the following cash
dividends: 2007, $6,000, 2008, $12,000, and 2009,
$28,000.
Instructions: (a) Show the allocation of dividends toeach class of stock, assuming the Preference Share
dividend is 8% and not cumulative.
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter14-10
Exercise (a) Show the allocation of dividends to eachclass of stock, assuming the Preference Share dividend
is 8% and not cumulative.
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
2007 2008 2009Dividends declared 6,000$ 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% = $8,000
*
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Chapter14-11
Exercise (b) Show the allocation of dividends to eachclass of stock, assuming the Preference Share dividend
is 9% and cumulative.
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
2007 2008 2009Dividends declared 6,000$ 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
*
**2007 Pfd. dividends $9,000 declared $6,000 = $3,000
**
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Chapter14-12
Exercise (c) Journalize the declaration of the cashdividend at December 31, 2009, under part (b).
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
Cash Dividen 28,000
Dividends payable 28,000
2007 2008 2009
Dividends declared 6,000$ 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:
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Chapter14-13
Stock DividendsPro rata distribution of the corporations own stock.
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
Results in decrease in retained earnings and increase in Share Premium
Illustration 14-3
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Chapter14-14
Stock DividendsReasons why corporations issue stock dividends:
1. To satisfy stockholders dividend expectations
without spending cash.2. To increase the marketability of the corporations
stock.
3. To emphasize that a portion of stockholders equityhas been permanently reinvested in the business.
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter14-15
Size of Stock Dividends
Small stock dividend(less than 2025% of thecorporations issued stock, recorded at fair
market value)
Large stock dividend(greater than 2025% ofissued stock, recorded at par value)
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
*This accounting is based on the assumption that a smallstock dividend will have little effect on the market price ofthe outstanding shares.
*
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Chapter14-16
10% stock dividend is declared
Share Dividen (5,000 x 10% x $40) 20,000Ordinary Shares dividends Distributable 500Share Premium -Ordinary 19,500
Stock issuedOrdinary Shares div. distributable 500
Share Capital -Ordinary (5,000 x 10% x$1)
500
Illustration: HH Inc. has 5,000 shares issued andoutstanding. The per share par value is $1, book value$32 and market value is $40.
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter14-17
Stockholders' equityPaid-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 90,000Total stockholders' equity 160,000$
HH Inc.
Balance Sheet (partial)
Stockholders Equity with Dividends Distributable
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter14-18
HH Inc. Before After Net
Dividend Dividend Change
Stockholders' equity
Paid-in capitalCommon stock, $1 par, 5,000 issuedand outstanding 5,000$ 5,500$ 500$
Paid-in capital in excess of par 45,000 64,500 19,500Retained earnings 110,000 90,000 (20,000)
Total stockholders' equity 160,000$ 160,000$
Outstanding shares 5,000 5,500Book value per share 32$ 29$
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
Effects of Stock Dividends
$ 0
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Chapter14-19
Which of the following statements about small stockdividends is true?
a. A debit to Retained Earnings for the par value ofthe shares issued should be made.
b. A small stock dividend decreases totalstockholders equity.
c. Market value per share should be assigned to thedividend shares.
d. A small stock dividend ordinarily will have noeffect on book value per share of stock.
Question
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter14-20
In the stockholders equity section, Ordinary SharesDividends Distributable is reported as a(n):
a. deduction from total paid-in capital andretained earnings.
b. addition to additional paid-in capital.
c. deduction from retained earnings.
d. addition to capital stock.
Question
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter14-21
Stock Split
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number ofshares.
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter14-22
2 for 1 Stock SplitNo Entry -- Disclosure that par is now $.50 andshares outstanding are 10,000.
Illustration:HH Inc. has 5,000 shares issued andoutstanding. The per share par value is $1, bookvalue $32 and market value is $40.
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter14-23
HH Inc. Before After Net
Split Split Change
Stockholders' equity
Paid-in capitalCommon stock 5,000$ 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 10,000Book value per share 32$ 16$
Dividends
LO 1 Prepare the entries for cash dividends and stock dividends.
Effects of Stock Dividends
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Chapter14-24
Retained earningsis net income that a companyretains 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 isidentified as a deficit.
Retained Earnings
LO 2 Identify the items reported in a retained earnings statement.
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Chapter14-25
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Retained Earnings Restrictions
LO 2 Identify the items reported in a retained earnings statement.
Companies generally disclose retained earnings
restrictions in the notes to the financial statements.
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Chapter14-26
Corrections of ErrorsResult 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 retainedearnings
Prior Period Adjustments
LO 2 Identify the items reported in a retained earnings statement.
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Chapter14-27
Woods, Inc.
Statement of Retained EarningsFor 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 $50,000 error (net of tax) that caused the 2006 inventoryto be overstated (overstated inventory caused COGS to be lower andthus net income to be higher in 2006). Would this discovery have anyimpact on the reporting of the Statement of Retained Earnings for2007?
Prior Period Adjustments
LO 2 Identify the items reported in a retained earnings statement.
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Chapter14-28
Woods, Inc.
Statement of Retained EarningsFor the Year Ended December 31, 2007
Balance, January 1, as previously reported 1,050,000$
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 Statement
LO 2 Identify the items reported in a retained earnings statement.
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Chapter
14-29
Retained Earnings Statement
LO 2 Identify the items reported in a retained earnings statement.
The company prepares the statement from theRetained Earnings account.
Illustration 14-13
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Chapter
14-30
All but one of the following is reported in a retainedearnings 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.
Question
Retained Earnings Statement
LO 2 Identify the items reported in a retained earnings statement.
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Chapter
14-31 LO 3 Prepare and analyze a comprehensive stockholders equity section.
Statement Analysis and PresentationIllustration 14-15
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Chapter
14-32
Stockholders Equity Analysis
Net Income Availableto Ordinary Sharesholders
Return onOrdinary
SharesholdersEquity
= Average CommonStockholders Equity
LO 3 Prepare and analyze a comprehensive stockholders equity section.
Statement Analysis and Presentation
This ratio shows how many dollars of net income thecompany earned for each dollar invested by thestockholders.
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Chapter
14-33
IncomeStatementPresentation
LO 4 Describe the form and content of corporation income statements.
Statement Analysis and Presentation
Illustration 14-17
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Chapter
14-34
Income Statement Analysis
Net Income minusPreferred DividendsEarnings
Per Share = Weighted-Average CommonShares Outstanding
LO 5 Compute Earnings Per Share.
Statement Analysis and Presentation
This ratio indicates the net income earned by eachshare of outstanding Ordinary Shares.
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Chapter
14-35
The income statement for Nadeen, Inc. shows incomebefore income taxes $700,000, income tax expense$210,000, and net income $490,000. If Nadeen has
100,000 shares of Ordinary Shares outstandingthroughout the year, earnings per share is:
a. $7.00.
b. $4.90.c. $2.10.
d. No correct answer is given.
Question
($490,000 / 100,000 = $4.90)
LO 5 Compute Earnings Per Share.
Statement Analysis and Presentation
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Chapter
14 36
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