Accounting principles 9e willey kieso chapter 14

Chapter 14Corporations: Dividends, Retained Earnings, and Income Reporting... Cash dividends Stock dividends Stock splits Retained earnings restrictions Prior period adjustments Retain

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Chapter 14-1

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Chapter 14

Corporations:

Dividends, Retained Earnings, and Income

Reporting

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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

Retained Earnings

Statement Presentation and

Analysis

Statement Presentation and

Analysis

Corporations: Dividends, Retained Earnings,

and Income Reporting Corporations: Dividends, Retained Earnings,

and Income Reporting

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Chapter

14-5

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

14-7

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: On Dec 1, the directors of Media General

declare a 50¢ 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?

December 1 (Declaration Date)

December 22 (Date of Record)

January 20 (Payment Date)

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SO 1 Prepare the entries for cash dividends and stock dividends.

Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common

stockholders receive dividends

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Dividends

Illustration: On December 31, 2010, 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, 2010, the directors declare a

$6,000 cash dividend Prepare the entry to record the

declaration of the dividend.

Retained earnings 6,000

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

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$ 40,000

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Chapter 14-13

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Chapter

14-15

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

14-17

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

14-19

Dividend Dividend Change

Stockholders' equity

Paid-in capital

Common stock, $1 par, 5,000 issued

and 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

Dividends

Effects of Stock Dividends

$ 0

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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

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Chapter

14-21

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

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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

14-23

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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Chapter

14-25

Effects of Stock Splits

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

Net income increases Retained Earnings and a net loss decreases Retained Earnings

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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Retained Earnings Restrictions

SO 2 Identify the items reported in a retained earnings statement.

Companies generally disclose retained earnings

restrictions in the notes to the financial statements

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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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Chapter

14-29

Before issuing the report for the year ended December 31, 2010, you discover a

$50,000 error (net of tax) that caused the 2009 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be

higher in 2009 Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2010?

Prior Period Adjustments

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Retained Earnings Statement

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Chapter

14-31

The company prepares the statement from the

Retained Earnings account.

Illustration 14-13

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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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Chapter

14-33 SO 3 Prepare and analyze a comprehensive stockholders’ equity section.

Statement Analysis and Presentation

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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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SO 4 Describe the form and content of corporation income statements.

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Income Statement Analysis

Net Income minus Preferred Dividends

Earnings

Per Share = Weighted-Average Common

Shares Outstanding

This ratio indicates the net income earned by each

share of outstanding common stock

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Chapter

14-37

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:

SO 5 Compute Earnings Per Share.

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