Retained Earnings, TreasuryStock, and the Income Statement pptx

Small Stock Dividend Example• The dividend is valued at the product of the number of shares distributed times the market price at declaration date.. • San Diego Company, with 300,000 sha

Retained Earnings, Treasury

Stock, and the Income

Statement

Chapter

14

Retained Earnings

and Dividends

• Retained Earnings shows the amount of income allowed to accumulate from the beginning of the corporation’s life to the present

• Retained Earnings represents a claim on assets, but it is not cash

Retained Earnings

and Dividends

• The balance in the Income Summary

account is closed to Retained Earnings at period end

• Dividends are distributions to the

stockholders

• To declare dividends there must be

adequate retained earnings

Objective 1 Account for Stock Dividends.

Stock Dividends

• What are stock dividends?

• They are a proportional distribution of a corporation’s own stock to shareholders

• They do not change total stockholders’ equity

• A stock dividend is a transfer of retained earnings to contributed capital

Small Stock Dividend Example

• The dividend is valued at the product of the number of shares distributed times the market price at declaration date

• San Diego Company, with 300,000 shares

of $2 par value common stock outstanding, declares a 15% stock dividend when the

shares are trading at $20

Small Stock Dividend Example

• How much stock do the shareholders

receive?

• 300,000 × 15% = 45,000 shares

• 45,000 at $20 per share = $900,000, and

45,000 at $2 per share = $90,000What is the entry when the dividend is distributed?

Small Stock Dividend Example

Retained Earnings 900,000

Common Stock 90,000Paid-in Capital in

Excess of Par 810,00015% common stock dividend distributed

Stock Split

• This is an increase in the number of

authorized, issued, and outstanding shares

• It is a reduction in the par value

• The market value is usually affected

proportionately

Stock Split

• A 5-for-1 stock split means that the

company would have five times as many shares outstanding after the split as it had before

• Each share’s par value would be divided

by five

Stock Split Example

• Prior to a 5-for-1 split, San Diego

Company had 500,000 shares of $10 par common stock authorized and 100,000 issued

• After the split, 2,500,000 are authorized

• 500,000 are issued

• What is the par value per share?

• $10 ÷ 5 = $2

Objective 2 Distinguish Stock Splits from Stock Dividends.

Similarities Between Stock Splits and Stock Dividends

Both increase the number of shares

of stock owned per stockholder

Neither change the investor’scost of the stock they own

Neither type of income creates

taxable income for the investor

Differences Between Stock

Splits and Stock Dividends

retained earnings to paid-in capital

• The par value per share remains

unchanged

• It changes the par value of the stock

• It increases the number of shares of stock authorized, issued, and outstanding

Objective 3 Account for Treasury Stock.

Treasury Stock Example

• San Diego Company purchased 1,000

shares of its own $10 par value common stock at $20 per share (500,000 shares are authorized, 10,000 are issued.)

Treasury Stock 20,000

Purchased 1,000 shares of treasury stock

Treasury Stock Example

Stockholders’ Equity(Before purchase of treasury stock)

Common stock, $10 par, 10,000 issued $100,000+ Paid-in capital in excess of par 800,000

= Total paid-in capital $900,000+ Retained earnings 50,000

= Total stockholders’ equity $950,000

Treasury Stock Example

(After purchase of treasury stock)

Common stock, $10 par, 10,000 issued,

9,000 outstanding $100,000+ Paid-in capital in excess of par 800,000+ Retained earnings 50,000

– Treasury stock, 1,000 shares 20,000

Sale of Treasury Stock Example

• No gain or loss is recognized on the sale of treasury shares

• Excess of sales price over cost is credited

to Paid-in Capital-Treasury Stock

transactions

• Assume that 100 shares of treasury stock are sold at $22

Cash 2,200Treasury Stock 2,000Paid-In Capital from

Treasury Stock 200Sold 100 shares of treasury stock

Sale of Treasury Stock Example

What if 100 shares of treasury stock are sold at $18?

Cash 1,800

Paid-In Capital from

Treasury Stock 200

Treasury Stock 2,000Sold 100 shares of treasury stock

Sale of Treasury Stock Example

Sale of Treasury Stock Example

• What if the resale price is less than cost?

• Debit Paid-in Capital from Treasury Stock Transactions

• Debit Retained Earnings if the Paid-in

Capital from Treasury Stock Transactions

is too small

Retirement of Stock

…decreases the outstanding stock of the corporation

• Retired shares cannot be reissued.

• There is no gain or loss on retirement

Objective 4 Report Restrictions on Retained Earnings.

Restrictions on Retained Earnings

• Restrictions are reported on the notes to the financial statements

• Appropriations are restrictions on retained earnings that are recorded by formal

journal entries

• Retained earnings appropriations are rare

• There are many acceptable variations in format for presenting stockholders’ equity

Variations in Reporting Stockholders’ Equity

1 The heading Paid-in Capital does not

Objective 5 Analyze a Complex Income

Statement.

The Corporate Income

Statement (Continuing Operations)

Allied CorporationIncome StatementYear Ended December 31, 20xx

Net sales revenue $500,000

Cost of goods sold 240,000

Operating expenses 181,000Operating income 79,000

Net sales revenue $500,000

Cost of goods sold 240,000

Gross profit 260,000

Operating expenses 181,000Operating income 79,000

The Corporate Income

Statement (Continuing Operations)

Operating income 79,000Other gains (losses):

Loss on restructuring operations 10,000Gain on sale of machinery 21,000Income from continuing operations

before income tax 90,000Income tax expense 36,000

The Corporate Income

Statement (Special Items)

Discontinued operations income of

$35,000, less income tax of $14,000 21,000 Income before extraordinary item

and cumulative effect of change in

Extraordinary flood loss, $20,000,

less income tax savings of $8,000 –12,000 Cumulative effect of change in

depreciation method, $10,000,

less income tax of $4,000 6,000

The Corporate Income

Statement (Earnings per Share)

Earnings per share of common stock

(20,000 shares outstanding):

Income from continuing operations $2.70 Income from discontinued operations 1.05

Income before extraordinary item

and cumulative effect of change

Cumulative effect of change in

Analyzing the Corporate

Income Statement

• Extraordinary items are both unusual and infrequent

• They are reported net of their tax effect

• The environment must be considered when determining whether an item is unusual

• Accounting rules specify extraordinary

items

Analyzing the Corporate

Analyzing the Corporate

Earnings Per Share Example

• On January 1, San Diego Company had

100,000 common shares outstanding

• On May 1, the company purchased 15,000 treasury shares

• On September 1, they issued 50,000 new shares

• Income for the year was $135,000

• What are the earnings per share?

No of Shares Fraction WeightedOutstanding of Year Average100,000 × 4/12 = 33,333 85,000 × 4/12 = 28,333135,000 × 4/12 = 45,000

EPS = $135,000 ÷ 106,666 = $1.27

Earnings Per Share Example

Earnings Per Share and Preferred Stock

• Preferred dividends must be subtracted

from income subtotals (income from

continuing operations, income before

extraordinary items, and net income) in the computation on EPS

• They are not subtracted from income or

loss from discontinued operations, or from extraordinary gains or losses

Earnings Per Share and Preferred Stock

• Corporations with complex capital

structures present two sets of EPS amounts

1 EPS based on outstanding common shares (basic EPS)

2 EPS based on outstanding common shares plus the number of additional common

shares that would arise from conversion of the preferred stock

Reporting Comprehensive Income

• FASB Statement 130 requires companies with certain gains and losses to report a comprehensive income figure

• Comprehensive income is the company’s change in total stockholders’ equity from all sources other than from the owners of the business

FASB 130 New Comprehensive

Income Components

Unrealized gains or losses

on certain investments

Foreign-currencytranslation adjustment

Reporting Comprehensive Income

Prior Period Adjustments

– are corrections to the beginning balance of Retained Earnings for errors of an earlier period

• The correcting entry includes a debit or

credit to Retained Earnings for the error

amount

• It also includes a debit or credit to the asset

or liability account that was misstated

De Graff Corporation Year Ended December 31, 20x5 Retained earnings, Dec 31, 20x4 (original) $390,000 Less: Prior-period adjustments – to correct

error in the 20x4 income tax 10,000 Retained earnings, Dec 31, 20x4, adjusted $380,000

Deduct: Dividends declared in 20x5 41,000

Statement of Retained Earnings

Example

Objective 6 Prepare a Statement of Stockholders’ Equity.

Statement of Stockholders’ Equity

• Most companies report a statement of

stockholders’ equity, which is more

comprehensive than a statement of retained earnings

Statement of Stockholders’ Equity

…reports changes in all categories of equity during the period

• It reports stock transactions, dividends, and the effects of treasury stock transactions

Statement of Stockholders’

Equity Example

Additional Common Paid-in Retained Stock Capital Earnings Balance, December 31, 20x4 $ 80,000 $160,000 $130,000 Issuance of stock 20,000 65,000

Cash dividends (21,000) Stock dividends – 8% 8,000 26,000 (34,000) Purchase of treasury stock

Sale of treasury stock 13,000

Statement of Stockholders’

Equity Example

Treasury Stock Total Balance, December 31, 20x4 $(25,000) $345,000 Issuance of stock 85,000

Cash dividends (21,000) Stock dividends – 8% -0- Purchase of treasury stock (9,000) (9,000) Sale of treasury stock 4,000 17,000

End of Chapter

14