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:
DividendsDividendsDividendsDividends
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.
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
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)
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
Dividends payable 50,000Cash 50,000
Chapter 14-8
Allocating Cash Dividends Between Preferred and Common Stock
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
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, $28,000.
Instructions: (a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and not cumulative.
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 14-10
ExerciseExercise (a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and not cumulative.
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
2008 2009 2010
Dividends declared 6,000$ 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% = $8,000
*
Chapter 14-11
ExerciseExercise (b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 9% and cumulative.
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
2008 2009 2010
Dividends declared 6,000$ 12,000$ 28,000$
Dividends in ar rears 3,000
A llocation to pref er red 6,000 9,000 9,000
Remainder to common -$ -$ 19,000$
* 2,000 shares x $50 par x 9% = $9,000
*
** 2008 Pfd. dividends $9,000 – declared $6,000 = $3,000
**
Chapter 14-12
ExerciseExercise (c) Journalize the declaration of the cash dividend at December 31, 2010, under part (b).
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
Retained earnings 28,000
Dividends payable
28,000
2008 2009 2010
Dividends declared 6,000$ 12,000$ 28,000$
Dividends in ar rears 3,000
A llocation to pref er red 6,000 9,000 9,000
Remainder to common -$ -$ 19,000$
Journal entry:
Chapter 14-13
Stock Dividends
Pro rata distribution of the corporation’s own stock.
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
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.
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
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)
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
* 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.
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
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
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
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$
DividendsDividendsDividendsDividends
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
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.
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
DividendsDividendsDividendsDividends
LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.dividends.