Accounting principles 11e kieso kimmel chapter 014

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

Prepared by Coby Harmon University of California, Santa Barbara

Westmont College

Learning Objectives

After studying this chapter, you should be able to:

[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.

Retained Earnings, and Income Reporting

Preview of Chapter 14

Accounting Principles Eleventh Edition Weygandt Kimmel Kieso

Distribution of cash or stock to stockholders on a pro rata

(proportional) basis

Types of Dividends:

1 Cash dividends.

2 Property dividends.

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

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

3 Stock dividends.

4 Scrip (promissory note).

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.

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

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)

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

Dividends Payable 50,000

No entry Dividends

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.

Dividends

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

Illustration: On December 31, 2014, 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, 2014, the directors declare a $6,000 cash dividend Prepare the entry to record the declaration of the dividend.

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

Dividends

**

Illustration: At December 31, 2015, 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 LO 1 Prepare the entries for cash dividends and stock dividends.

Illustration: At December 31, 2015, IBR declares a $50,000 cash

dividend Prepare the entry to record the declaration of the

dividend.

Dividends

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

Dividends

Stock Dividends

Pro rata distribution of the corporation’s own stock.

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

Illustration 14-5

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.

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)

LO 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

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

Statement Presentation

Effects of Stock Dividends

Dividends

Illustration 14-4

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

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

Dividends

 Issuance of additional shares to stockholders according to

their percentage ownership.

 Reduces the market value of shares.

 No entry recorded for a stock split.

 Decrease par value and increase number of shares.

Stock Splits

Helpful Hint A stock split

changes the par value pershare but does not affectany balances in

stockholders’ equity

Helpful Hint A stock splitchanges the par value pershare but does not affectany balances in

stockholders’ equity

Stock Splits

Effect of stock split for stockholders

Illustration 14-5

14-23 LO 1 Prepare the entries for cash dividends and stock dividends.

Effects for Medland Corporation, assuming that it splits its

50,000 shares of common stock on a 2-for-1 basis.

Dividends

Illustration 14-6

 Net income increases Retained Earnings and a net loss

decreases Retained Earnings.

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

Restrictions can result from:

► mistakes in application of accounting principles.

► oversight or misuse of facts.

 Adjustment made to the beginning balance of retained

earnings.

LO 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, 2014, you discover a

$50,000 error (net of tax) that caused the 2013 inventory to be overstated

Retained Earnings Statement

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

Retained Earnings Statement

Debits and Credits to Retained Earnings

Illustration 14-13Retained 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

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

Retained Earnings Statement

Statement Presentation

Illustration 14-15

LO 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

Analysis

Income Statement Analysis

Net Income minus Preferred Dividends

Earnings

Per Share =

Weighted-Average Common

Shares Outstanding

LO 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

Key Points

A Look at IFRS

LO 6 Compare the accounting for dividends, retained earnings,

and income reporting under GAAP and IFRS.

 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

A Look at IFRS

 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

Key Points

A Look at IFRS

LO 6 Compare the accounting for dividends, retained earnings,

and income reporting under GAAP and IFRS.

 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

 The computations related to earnings per share are essentially the

same under IFRS and GAAP

Looking to the Future

A Look at IFRS

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 This

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

IFRS Self-Test Questions

LO 6 Compare the accounting for dividends, retained earnings,

and income reporting under GAAP and IFRS.

A Look at 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.

A Look at IFRS

IFRS Self-Test Questions

LO 6 Compare the accounting for dividends, retained earnings,

and income reporting under GAAP and IFRS.

Under IFRS, a statement of comprehensive income must include:

a) accounts payable.

b) retained earnings.

c) income tax expense.

d) preference stock.

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