Accounting principles 12th willey kieso chapter 14

1, the directors of Media General declare a 50 cents per share cash dividend on 100,000 shares of $10 par value common stock..  Cumulative Dividend Preferred stockholders must be paid

Corporations: Dividends, Retained Earnings, and Income Reporting

14

Learning Objectives

Explain how to account for cash dividends.

Explain how to account for stock dividends and splits.

Prepare and analyze a comprehensive stockholders’ equity section.

Distribution of cash or stock to stockholders on a pro rata (proportional to ownership) basis

For a corporation to pay a cash dividend, it must have:

Cash Dividends

Three dates are important:

Illustration 14-1

Key dividend dates

Cash Dividends

Illustration: On Dec 1, the directors of Media General declare a 50 cents per share cash dividend on 100,000 shares

of $10 par value common stock The dividend is payable on Jan 20 to shareholders of record on Dec 22

Dec 1 (Declaration Date)

Dec 22 (Date of Record)

Jan 20 (Payment Date)

No entry

Cash Dividends

 Right to receive dividends before common stockholders.

 Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a

specified amount.

 Cumulative Dividend Preferred stockholders must be

paid both current-year dividends and any unpaid year dividends before common stockholders receive dividends.

prior-Dividend Preferences

CUMULATIVE DIVIDEND

Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par value, cumulative preferred stock outstanding

Each $100 share pays a $7 dividend (.07 x $100) The annual dividend is $35,000 (5,000 x $7 per share) If

dividends are two years in arrears, preferred stockholders are entitled to receive the following dividends in the

current year

Illustration 14-2

Computation of total dividends to preferred stock

Dividend Preferences

ALLOCATING CASH DIVIDENDS BETWEEN PREFERRED AND COMMON

STOCK

Holders of cumulative preferred stock must be paid any unpaid prior-year dividends and their current

year’s dividend before common stockholders receive dividends.

Dividend Preferences

Illustration: On December 31, 2017, IBR Inc has 1,000 shares of 8%, $100 par value cumulative preferred

stock It also has 50,000 shares of $10 par value common stock outstanding At December 31, 2017, the

directors declare a $6,000 cash dividend Prepare the entry to record the declaration of the dividend

Cash Dividends 6,000

Dividends Payable 6,000

Preferred Dividends: 1,000 shares x $100 par x 8% = $8,000

ALLOCATING CASH DIVIDENDS

* 1,000 shares x $100 par x 8% = $8,000

*

** 2017 Pfd dividends $8,000 – declared $6,000 = $2,000

**

Illustration: At December 31, 2018, IBR declares a $50,000 cash dividend Show the allocation of dividends to

each class of stock

$ 50,0002,0008,000

$ 40,000

ALLOCATING CASH DIVIDENDS

Illustration: At December 31, 2018, IBR declares a $50,000 cash dividend Prepare the entry to record the

declaration of the dividend.

Cash Dividends 50,000

Dividends Payable 50,000

ALLOCATING CASH DIVIDENDS

Preferred stockholders are paid only this year’s dividend

Preferred stockholders = $12,000 (2,000 x 06 x $100)

Common stockholders = $48,000 ($60,000 - $12,000).

DO IT! 1 Dividends on Preferred and Common Stock

MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017 At

December 31, 2017, the company declared a $60,000 cash dividend Determine the dividend paid to preferred

stockholders and common stockholders under each of the following scenarios

1. The preferred stock is noncumulative, and the company has not missed any dividends in previous years.

Solution

Past unpaid dividends do not have to be paid

Preferred stockholders = $12,000 (2,000 x 06 x $100)

Common stockholders = $48,000 ($60,000 - $12,000).

MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017 At

December 31, 2017, the company declared a $60,000 cash dividend Determine the dividend paid to preferred

stockholders and common stockholders under each of the following scenarios

2. The preferred stock is noncumulative, and the company did not pay a dividend in each of the two previous

years.

Solution

DO IT! 1 Dividends on Preferred and Common Stock

Dividends that have been missed (dividends in arrears) must be paid.

Preferred stockholders = $36,000 (3 x 2,000 x 06 x $100)

Common stockholders = $24,000 ($60,000 - $36,000).

MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017 At

December 31, 2017, the company declared a $60,000 cash dividend Determine the dividend paid to preferred

stockholders and common stockholders under each of the following scenarios

3. The preferred stock is cumulative, and the company did not pay a dividend in each of the two previous

years.

Solution

DO IT! 1 Dividends on Preferred and Common Stock

A pro rata (proportional to ownership) distribution of the corporation’s own stock to stockholders.

Reasons why corporations issue stock dividends:

1 Satisfy stockholders’ dividend expectations without spending cash.

2 Increase marketability of the corporation’s stock

3 Emphasize a portion of stockholders’ equity has been permanently reinvested in the business.

Stock Dividends

LEARNING

OBJECTIVE 2 Explain how to account for stock dividends and splits.

 Small stock dividend (less than 20–25% of the corporation’s issued stock, recorded at fair market

value)

* Accounting based on the assumption that a small stock dividend will have little effect on the market price of the

outstanding shares

*

Stock Dividends

Illustration: Medland Corporation declares a 10% stock dividend on its 50,000 shares of $10 par value common stock

The current fair market value of its stock is $15 per share Record the entry on the declaration date:

Illustration 14-4 Statement Presentation

ENRTIES FOR STOCK DIVIDENDS

Illustration: Medland Corporation declares a 10% stock dividend on its 50,000 shares of $10 par value common stock

The current fair market value of its stock is $15 per share Record the entry on the declaration date:

Record the journal entry when Medland issues the dividend shares

ENRTIES FOR STOCK DIVIDENDS

EFFECTS OF STOCK DIVIDENDS

Illustration 14-5

Stock Dividends

Which of the following statements about small stock dividends is true?

a. A debit to Stock Dividends 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 an effect on par value per share of stock

Question

Stock Dividends

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

Stock Dividends

Stock Splits

 Issuance of additional shares to stockholders according to their percentage ownership.

 Reduction in the par or stated value per share.

 Increase in number of shares outstanding.

 Reduces the market value of shares.

 No journal entry recorded.

Effect of 4-for-1 stock split for stockholders

Illustration 14-6

Stock Splits

Effects for Medland Corporation, assuming that it splits its 50,000 shares of common stock on a 2-for-1

basis.

Illustration 14-7

Stock Splits

Investor Insight Berkshire Hathaway

A No-Split Philosophy

Warren Buffett’s company, Berkshire Hathaway, has two classes of shares Until recently, the company had never split either

class of stock As a result, the class A stock had a market price of$97,000 and the class B sold for about $3,200 per share Because the price per share is so high, the stock does not trade as frequently as the stock of other companies Buffett has always opposed stock splits because he feels that a lower stock price attracts short-term investors He appears to be correct For example, while more than 6 million shares of IBM are exchanged on the average day, only about 1,000 class A shares of Berkshire are traded Despite Buffett’s aversion to splits, in order to accomplish a recent acquisition, Berkshire decided to split its class B shares 50 to 1

Source: Scott Patterson, “Berkshire Nears Smaller Baby B’s,” Wall Street Journal Online (January 19, 2010).

DO IT! 2 Stock Dividends and Stock Splits

Sing CD Company has had five years of record earnings Due to this success, the market price of its 500,000 shares

of $2 par value common stock has tripled from $15 per share to $45 During this period, paid-in capital remained the same at $2,000,000 Retained earnings increased from $1,500,000 to $10,000,000 President Joan Elbert is

considering either a 10% stock dividend or a 2-for-1 stock split She asks you to show the before-and-after effects of each option on retained earnings, total stockholders’ equity, and par value per share

DO IT! 2 Stock Dividends and Stock Splits

Sing CD Company has had five years of record earnings Due to this success, the market price of its 500,000 shares

of $2 par value common stock has tripled from $15 per share to $45 President Joan Elbert is considering either a

10% stock dividend or a 2-for-1 stock split

Retained earnings is net income that a company retains in the business.

 Part of the stockholders’ claim on the total assets of the corporation.

 Debit balance in Retained Earnings is identified as a deficit.

Restrictions can result from:

 Correction of an error in previously issued financial statements.

 Result from:

► mathematical mistakes.

► mistakes in application of accounting principles.

► oversight or misuse of facts.

 Adjustment made to the beginning balance of retained earnings.

PRIOR PERIOD ADJUSTMENTS

Retained Earnings

Before issuing the report for the year ended December 31, 2017, you discover a $50,000 error (net of tax) that caused the 2016 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2016 Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2017?

RETAINED EARNINGS STATEMENT

RETAINED EARNINGS STATEMENT

Debits and Credits to Retained Earnings

Illustration 14-13

RETAINED EARNINGS STATEMENT

Illustration 14-14

Retained earnings statement

RETAINED EARNINGS STATEMENT

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

RETAINED EARNINGS STATEMENT

Statement Presentation and Analysis

Illustration 14-15

Comprehensive stockholders’

equity section

Ratio shows how many dollars of net income the company earned for each dollar invested by the common

stockholders

Statement Presentation and Analysis

ANALYSIS

To illustrate, Walt Disney Company’s beginning-of-the-year and end-of-the-year common stockholders’ equity were

$31,820 and $30,753 million, respectively Its net income was $4,687 million, and no preferred stock was outstanding

Illustration 14-16

DO IT! 3 Retained Earnings Statement

Vega Corporation has retained earnings of $5,130,000 on January 1, 2017 During the year, Vega earned

$2,000,000 of net income It declared and paid a $250,000 cash dividend In 2017, Vega recorded an

adjustment of $180,000 due to the understatement (from a mathematical error) of 2016 depreciation

expense Prepare a retained earnings statement for 2017

Prepare a retained earnings statement for 2017

DO IT! 3 Retained Earnings Statement

Net Income minus Preferred Dividends

Earnings Per Share

=

Weighted-Average Common Shares Outstanding

Ratio indicates the net income earned by each share

of outstanding common stock.

Income Statement Analysis

EPS AND PREFERRED DIVIDENDS

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:

People, Planet, and Profit Insight

DO IT! 4 Stockholders’ Equity and EPS

(a) Compute return on common stockholders’ equity for each year.

DO IT! 4 Stockholders’ Equity and EPS

(b) Compute earnings per share for each year.

Key Points

Similarities

 The accounting related to prior period adjustment is essentially the same under IFRS and GAAP.

 The stockholders’ equity section is essentially the same under IFRS and GAAP However, terminology used to

describe certain components is often different These differences are discussed in Chapter 13

Key Points

 The income statement using IFRS is called the statement of comprehensive income A statement of comprehensive

income is presented in a one- or two-statement format The single-statement approach includes all items of income and expense, as well as each component of other comprehensive income or loss by its individual characteristic In the two-statement approach, a traditional income statement is prepared It is then followed by a statement of

comprehensive income, which starts with net income or loss and then adds other comprehensive income or loss items Regardless of which approach is reported, income tax expense is required to be reported

 The computations related to earnings per share are essentially the same under IFRS and GAAP.

A Look at IFRS

Key Points

Differences

 Under IFRS, the term reserves is used to describe all equity accounts other than those arising from contributed

(paid-in) capital This would include, for example, reserves related to retained earnings, asset revaluations, and fair value differences

 IFRS often uses terms such as retained profits or accumulated profit or loss to describe retained earnings The

term retained earnings is also often used

 Equity is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves,

and share holders’ funds

A Look at IFRS

Looking to the Future

The IASB and the FASB are currently working on a project related to financial statement presentation An important part of this

study is to determine whether certain line items, subtotals, and totals should be clearly defined and required to be displayed in the financial statements For example, it is likely that the statement of stockholders’ equity and its presentation will be examined

closely

Both the IASB and FASB are working toward convergence of any remaining differences related to earnings per share

computations

A Look at IFRS

IFRS Self-Test Questions

The basic accounting for cash dividends and stock dividends:

a) is different under IFRS versus GAAP

b) is the same under IFRS and GAAP

c) differs only for the accounting for cash dividends between GAAP and IFRS

d) differs only for the accounting for stock dividends between GAAP and IFRS

A Look at IFRS

Under IFRS, a statement of comprehensive income must include:

A Look at IFRS

IFRS Self-Test Questions

Earnings per share computations related to IFRS and GAAP:

a) are essentially similar

b) result in an amount referred to as earnings per share

c) must deduct preferred (preference) dividends when computing earnings per share

d) All of the answer choices are correct

A Look at IFRS