Accounting principles 8th weygars kieso kimmel chapter 14

CHAPTER 14CHAPTER 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING Accounting Principles, Eighth Edition... Corporations: Dividends, Retained Earnings, and Income Re

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CHAPTER 14

CORPORATIONS:

DIVIDENDS, RETAINED EARNINGS, AND INCOME

REPORTING

Accounting Principles, Eighth Edition

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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 Objectives

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Corporations: Dividends, Retained Earnings, and Income Reporting

Dividends

Dividends Retained

Earnings

Retained Earnings

Statement Presentation and

Analysis

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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Chapter

A distribution of cash or stock to stockholders

on a pro rata (proportional) basis

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Dividends require information concerning three dates:

Dividends

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Chapter

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

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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

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Chapter

Allocating Cash Dividends Between

Preferred and Common Stock

Dividends

Holders of cumulative preferred stock must be

paid any unpaid prior-year dividends before

common stockholders receive dividends.

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Exercise 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

Dividends

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Chapter

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

Dividends

* 2,000 shares x $50 par x 8% = $8,000

*

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

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Chapter

Exercise (c) Journalize the declaration of the cash

dividend at December 31, 2010, under part (b)

Dividends

Dividends payable 28,000

Journal entry:

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Chapter

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

Dividends

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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)

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

*

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Chapter

10% stock dividend is declared

Retained earnings (5,000 x 10% x $40) 20,000

Stock issued

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

Dividends

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Stockholders’ Equity with Dividends Distributable

Dividends

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Chapter

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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.

Question

Dividends

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Chapter

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

Question

Dividends

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Stock Split

Reduces the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number of shares.

Dividends

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Chapter

2 for 1 Stock Split

No Entry Disclosure that par is now $.50 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

Dividends

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HH Inc. Before After Net

Split Split Change

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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 Earnings

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Restrictions can result from:

1. Legal restrictions

2. Contractual restrictions

3. Voluntary restrictions

Retained Earnings Restrictions

Companies generally disclose retained earnings

restrictions in the notes to the financial statements

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Chapter

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 Adjustments

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Before issuing the report for the year ended December 31, 2008, you discover a $50,000 error (net of tax) that caused the 2007 inventory

to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2007 Would this discovery have any impact on the reporting of the Statement of Retained Earnings for

2008?

Prior Period Adjustments

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Chapter

Retained Earnings Statement

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The company prepares the statement from the

Retained Earnings account.

Illustration 14-13

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Chapter

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

Question

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Statement Analysis and Presentation

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Chapter

Stockholders’ Equity Analysis

Net Income Available

This ratio shows how many dollars of net income the

company earned for each dollar invested by the

stockholders

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Income

Statement

Presentation

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Chapter

Income Statement Analysis

Net Income minus Preferred Dividends

Earnings

Shares Outstanding

This ratio indicates the net income earned by each

share of outstanding common stock

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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:

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