Lecture Accounting principles (8th edition) – Chapter 14: Corporations: Dividends, retained earnings, and income reporting

In this chapter, the learning objectives are: Explain how to account for cash dividends, explain how to account for stock dividends and splits, prepare and analyze a comprehensive stockholders’ equity section.

CHAPTER  14

CORPORATIONS:

DIVIDENDS, RETAINED EARNINGS, AND INCOME

REPORTING

Accounting Principles,  Eighth Edition

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

Dividends

Dividends

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

Dividends

Allo c atio n to  pr e f e r r e d          6 ,0 0 0         8 ,0 0 0        8 ,0 0 0

Re maind e r  to  c o mmo n $           ­ $       4 ,0 0 0 $    2 0 ,0 0 0

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

*

Divid e nd s  in ar r e ar s         3 ,0 0 0

Allo c atio n to  pr e f e r r e d          6 ,0 0 0         9 ,0 0 0        9 ,0 0 0

Re maind e r  to  c o mmo n $           ­ $          ­ $    19 ,0 0 0

*    2,000 shares x $50 par x 9% =  $9,000

*

**  2008 Pfd. dividends $9,000 – declared $6,000 =  $3,000  

**

Divid e nd s  in ar r e ar s         3 ,0 0 0

Allo c atio n to  pr e f e r r e d          6 ,0 0 0         9 ,0 0 0        9 ,0 0 0

Re maind e r  to  c o mmo n $           ­ $          ­ $    19 ,0 0 0

Journal entry:

Stockholders' equity

Paid-in capital Common stock, $1 par, 5,000 issued

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)

Total stockholders' equity $ 160,000 $ 160,000

No Entry ­­ Disclosure that par is now $.50 and shares  outstanding are 10,000.

per share par value is $1, book value $32 and market value is $40.

Dividends

Dividends

HH Inc. Before After Net

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

Retained Earnings

Prior Period Adjustments

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

Prior Period Adjustments

Woods, Inc.

Statement of Retained Earnings For the Year Ended December 31, 2008

Statement Analysis and Presentation

Illustration 14­15

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Copyright

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