Accounting principles 8th weygars kieso kimmel chapter 14

Chapter
14-1


CHAPTER
CHAPTER 14
14

CORPORATIONS:
DIVIDENDS, RETAINED
EARNINGS, AND INCOME
REPORTING
Accounting Principles, Eighth Edition
Chapter
14-2


Study
Study Objectives
Objectives
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.

5.

Compute earnings per share.

Chapter
14-3


Corporations:
Corporations: Dividends,
Dividends, Retained
Retained
Earnings,
Earnings, and
and Income
Income Reporting
Reporting

Dividends
Dividends
Cash dividends

Stock dividends
Stock splits

Chapter
14-4

Retained
Retained
Earnings
Earnings
Retained earnings
restrictions
Prior period
adjustments
Retained earnings
statement

Statement
Statement
Presentation
Presentationand
and
Analysis
Analysis
Stockholders’
Equity
Presentation
Stockholders’
Equity Analysis
Income Statement

Presentation
Income Statement
Analysis


Dividends
Dividends
A distribution of cash or stock to stockholders
on a pro rata (proportional) basis.
Types of Dividends:
1.

Cash dividends.

2. Property dividends.

3. Script (promissory note).
4. Stock dividends.

Dividends expressed: (1) as a percentage of the par or
stated value, or (2) as a dollar amount per share.
Chapter
14-5

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


Dividends
Dividends
Dividends require information concerning three dates:

Chapter
14-6

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


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

Chapter
14-7

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
Dividends
Illustration: What would be the journal entries
made by a corporation that declared a $50,000 cash
dividend on March 10, payable on April 6 to
shareholders of record on March 25?
March 10 (Declaration Date)

Retained earnings
50,000
Dividends payable
50,000

March 25 (Date of Record)
entry
April 6 (Payment Date)

Chapter
14-8

Dividends payable
50,000
Cash
50,000

No

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

Dividends
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.

Chapter
14-9

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


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.
Chapter
14-10

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


Dividends
Dividends
Exercise (a) Show the allocation of dividends to each
class of stock, assuming the preferred stock dividend is
8% and not cumulative.

*

* 2,000 shares x $50 par x 8% = $8,000
Chapter
14-11

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


Dividends
Dividends
Exercise (b) Show the allocation of dividends to each
class of stock, assuming the preferred stock dividend is
9% and cumulative.

**
*

* 2,000 shares x $50 par x 9% = $9,000
** 2008 Pfd. dividends $9,000 – declared $6,000 = $3,000

Chapter
14-12

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


Dividends
Dividends
Exercise (c) Journalize the declaration of the cash
dividend at December 31, 2010, under part (b).

Journal entry:
Retained earnings
Dividends payable
28,000
Chapter
14-13

28,000

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


Dividends
Dividends
Stock Dividends

Illustration 14-3

Pro rata distribution of the corporation’s own stock.

Results in decrease in retained earnings and increase in paid-in capital.
Chapter
14-14

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


Dividends
Dividends
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.

Chapter
14-15

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


Dividends
Dividends
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)
* This accounting is based on the assumption that a small
stock dividend will have little effect on the market price of
the outstanding shares.
Chapter
14-16

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


Dividends
Dividends
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.
10% stock dividend is declared

Retained earnings (5,000 x 10% x $40)
20,000

Common stock dividends distributable
500
Additional paid-in capital
19,500
Stock issued

Common stock div. distributable
Common stock (5,000 x 10% x $1)
Chapter
14-17

500

500

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


Dividends
Dividends
Stockholders’ Equity with Dividends Distributable

Chapter
14-18

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


Dividends
Dividends

Effects of Stock Dividends
HH Inc.

Before
Dividend

Stockholders' equity
Paid-in capital
Common stock, $1 par, 5,000 issued
and outstanding
Paid-in capital in excess of par
Retained earnings
Total stockholders' equity
Outstanding shares
Book value per share

Chapter
14-19

$

5,000
45,000
110,000
$ 160,000
$

5,000
32

After
Dividend

$

5,500
64,500
90,000
$ 160,000
$

Net
Change

$ 500
19,500
(20,000)

$

0

5,500
29

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


Dividends
Dividends

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

Chapter
14-20

a.

A debit to Retained Earnings 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.
LO 1 Prepare the entries for cash dividends and stock dividends.


Dividends

Dividends
Question
In the stockholders’ equity section, Common Stock
Dividends Distributable is reported as a(n):

Chapter
14-21

a.

deduction from total paid-in capital and
retained earnings.

b.

current liability.

c.

deduction from retained earnings.

d.

addition to capital stock.

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


Dividends
Dividends

Stock Split
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of
shares.

Chapter
14-22

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


Dividends
Dividends
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.
2 for 1 Stock Split

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

Chapter
14-23

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


Dividends
Dividends

Effects of Stock Dividends
HH Inc.

Before
Split

Stockholders' equity
Paid-in capital
Common stock
Paid-in capital in excess of par
Retained earnings
Total stockholders' equity
Outstanding shares
Book value per share

Chapter
14-24

$

5,000
45,000
110,000
$ 160,000
$

5,000
32

After

Split

$

5,000
45,000
110,000
$ 160,000

Net
Change

$

$

-

10,000
$
16

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


Retained
Retained Earnings
Earnings
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.
Chapter
14-25

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