Accounting principles 10e by kieso chapter 14

Three dates: SO 1 Prepare the entries for cash dividends and stock dividends... December 1 Declaration Date December 22 Date of Record January 20 Payment Date SO 1 Prepare the entries fo

14-1

CHAPTER 14

Corporations:

Dividends, Retained Earnings, and Income Reporting

14-3

Distribution of cash or stock to stockholders on a pro

rata (proportional) basis

Types of Dividends:

Dividends expressed: (1) as a percentage of the par or

stated value, or (2) as a dollar amount per share.

Dividends

Three dates:

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

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.

Dividends

Cash Dividends

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)

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

No entry

Dividends

Allocating Cash Dividends Between Preferred

and Common Stock

Holders of cumulative preferred stock must be paid

any unpaid prior-year dividends before common

stockholders receive dividends.

Dividends

14-9 SO 1 Prepare the entries for cash dividends and stock dividends.

Illustration: On December 31, 2012, 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, 2012, the directors declare a $6,000 cash dividend Prepare the entry to record the declaration of the dividend.

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

Dividends

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

*

**

Illustration: At December 31, 2013, IBR declares a $50,000

cash dividend Show the allocation of dividends to each class of

stock.

$ 50,000

2,000 8,000

$ 40,000

Dividends

14-11 SO 1 Prepare the entries for cash dividends and stock dividends.

Pro rata distribution of the corporation’s own stock.

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

Results in decrease in retained earnings and increase in paid-in capital.

Illustration 14-3

Dividends

Stock Dividends

Reasons why corporations issue stock dividends:

spending cash.

permanently reinvested in the business.

Dividends

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)

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

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

*

Dividends

Stock Dividends

10% stock dividend is declared

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

Stockholders’ Equity with Dividends Distributable

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

Dividends

HH Inc. Before After Net

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)

Outstanding shares 5,000 5,500

Book value per share $ 32 $ 29

Effects of Stock Dividends

$ 0

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 no effect on

book value per share of stock.

Question

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

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.

Dividends

Question

14-21 SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends

 Reduces the market value of shares.

 No entry recorded for a stock split.

 Decrease par value and increase number of shares.

Stock Split

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

HH Inc. Before After Net

Split Split Change

Book value per share $ 32 $ 16

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

Effects of Stock Splits

Dividends

 Net income increases Retained Earnings and a net

loss decreases Retained Earnings.

Restrictions can result from:

► mistakes in application of accounting principles.

► oversight or misuse of facts.

earnings.

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

Prior Period Adjustments

Retained Earnings

Before issuing the report for the year ended December 31, 2012, you discover a

$50,000 error (net of tax) that caused the 2011 inventory to be overstated

(overstated inventory caused COGS to be lower and thus net income to be higher in

2011 Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2012?

Retained Earnings Statement

14-29 SO 2 Identify the items reported in a retained earnings statement.

Retained Earnings Statement

Debits and Credits to Retained Earnings

Illustration 14-13

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

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

Retained Earnings Statement

Statement Presentation and Analysis

Stockholders’

Equity

Presentation

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

Ratio shows how many dollars of net income the company

earned for each dollar invested by the stockholders.

Statement Presentation and Analysis

Stockholders’ Equity Analysis

Income Statement Analysis

Net Income minus Preferred Dividends

Earnings

Per Share = Weighted-Average Common

Shares Outstanding

SO 5 Compute Earnings Per Share.

Ratio indicates the net income earned by each share of

outstanding common stock

Statement Presentation and Analysis

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:

Key Points

 The term reserves is used in IFRS to indicate all non–

contributed (non–paid-in capital) Reserves include retained earnings and other comprehensive income items, such as revaluation surplus and unrealized gains or losses on available- for sale securities

 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.

Key Points

 The accounting related to prior period adjustment is essentially

the same under IFRS and GAAP One area where IFRS and GAAP differ in reporting relates to error corrections in

previously issued financial statements While IFRS requires restatement with some exceptions, GAAP does not permit any exceptions

 The stockholders’ equity section is essentially the same under

IFRS and GAAP However, terminology used to describe certain components is often different

 Equity is given various descriptions under IFRS, such as

shareholder’s equity, owners’ equity, capital and reserves, and

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 statement approach includes all items of income and expense,

single-as well single-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

 The computations related to earnings per share are essentially

the same under IFRS and GAAP

Looking into 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.

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.

IFRS Self-Test Questions

Which item in not considered part of reserves?

a) Unrealized loss on available-for-sale investments b) Revaluation surplus.

c) Retained earnings.

d) Issued shares.

IFRS Self-Test Questions

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