Chapter 14-1 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING

Chapter 14-1

CORPORATIONS: DIVIDENDS, RETAINED

EARNINGS, AND INCOME REPORTING

CORPORATIONS: DIVIDENDS, RETAINED

EARNINGS, AND INCOME REPORTING

Chapter 14-2

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 14-3

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 14-4

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 14-5

Dividends require information concerning three dates:


Chapter 14-6

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 dividends by the Board of Directors.



Chapter 14-7

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 14-8

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

ExerciseExercise Arnez Corporation was organized on January 1, 2008. 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: 2008, $6,000, 2009, $12,000, and 2010, $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

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



2008 2009 2010

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

A llocation to pref er red 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

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



2008 2009 2010


Dividends in ar rears 3,000


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

ExerciseExercise (c) Journalize the declaration of the cash dividend at December 31, 2010, under part (b).



Retained earnings 28,000

Dividends payable

28,000

2008 2009 2010


Dividends in ar rears 3,000


Remainder to common -$ -$ 19,000$

Journal entry:

Chapter 14-13

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 14-14

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 14-15

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 14-16

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 14-17

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 14-18

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$


Look page 601 Look page 601

Effects of Stock Dividends

$ 0

Chapter 14-19

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 14-20

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



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Chapter 14-1 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING