14-1. 14-2 CHAPTER14 Corporations: Dividends, Retained Earnings, and Income Reporting

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CHAPTER14Corporations:

Dividends,

Retained

Earnings, and

Income Reporting

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PreviewofCHAPTER14

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Distribution of cash or stock to stockholders on a pro

rata (proportional) basis.

Types of Dividends:

SO 1 Prepare the entries for cash dividends and stock 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.

Dividends

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Three dates:


Dividends

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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

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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)

Cash dividends 50,000

Dividends payable 50,000

December 22 (Date of Record)

January 20 (Payment Date)



Cash 50,000

No entry

Dividends

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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


2012 2013

Dividends declared 6,000$

Dividends in arrears

Allocation to preferred 6,000

Remainder to common -$

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

*

** 2012 Pfd. dividends $8,000 – declared $6,000 = $2,000

**

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



Dividends payable

50,000

Illustration: At December 31, 2013, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend.

Dividends

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Pro rata distribution of the corporation’s own stock.


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

Illustration 14-3

Dividends

Stock Dividends

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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

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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)


* 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

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10% stock dividend is declared

Stock dividends (5,000 x 10% x $40) 20,000

Common stock dividends distributable 500

Paid-in capital in excess of par value 19,500

Stock issued

Common stock dividends distributable 500

Common stock (5,000 x 10% x $1) 500

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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S tockholders' equityP aid-in capita l

C ommon stock, $1 par, 5 ,000 issuedand outstanding 5,000$

C om m on stock d ividends d istributab le 500 P aid-in capita l in excess of par 64,500

Retained earnings 90,000 Total stockholders' equity 160,000$

H H Inc.B alance S heet (partia l)

Stockholders’ Equity with Dividends Distributable


Dividends

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HH Inc. Before After NetDividend Dividend Change

Stockholders' equityPaid-in capital

Common stock, $1 par, 5,000 issuedand outstanding 5,000$ 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$


Effects of Stock Dividends

$ 0

Dividends

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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


Dividends

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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


Dividends

Reduces the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number of shares.

Stock Split

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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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HH Inc. Before After NetSplit Split Change

Stockholders' equityPaid-in capital

Common stock 5,000$ 5,000$ -$ Paid-in capital in excess of par 45,000 45,000 -

Retained earnings 110,000 110,000 - Total stockholders' equity 160,000$ 160,000$ -$

Outstanding shares 5,000 10,000

Book value per share 32$ 16$


Effects of Stock Splits

Dividends

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Net income increases Retained Earnings and a net

loss decreases Retained Earnings.

Part of the stockholders’ claim on the total assets of

the corporation.

Debit balance in Retained Earnings is identified as a

deficit.

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

Retained Earnings

Illustration 14-9

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Restrictions can result from:

1. Legal restrictions.

2. Contractual restrictions.

3. Voluntary restrictions.


Companies generally disclose retained earnings restrictions in

the notes to the financial statements.

Retained Earnings Restrictions

Retained Earnings

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Correction of an error in previously issued financial

statements.

Result from:

► mathematical mistakes.

► mistakes in application of accounting principles.

► oversight or misuse of facts.

Adjustment made to the beginning balance of retained

earnings.


Prior Period Adjustments

Retained Earnings

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Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$

For the Year Ended December 31, 2012Statement of Retained Earnings

Woods, Inc.

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

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Balance, January 1, as previously reported 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1, as restated 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$

For the Year Ended December 31, 2012Statement of Retained Earnings

Woods, Inc.



14-30 SO 2 Identify the items reported in a retained earnings statement.

Debits and Credits to Retained Earnings

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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Illustration 14-15

Statement Presentation and Analysis

Stockholders’ Equity Presentation

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Net Income Available to Common Stockholders

Return on Common

Stockholders’ Equity

=

Average Common Stockholders’ Equity

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.


Stockholders’ Equity Analysis

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Income Statement Presentation

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

Illustration 14-17


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Income Statement Analysis

Net Income minus Preferred DividendsEarnings

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.


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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:

a. $7.00.

b. $4.90.

c. $2.10.

d. No correct answer is given.

Question

($490,000 / 100,000 = $4.90)

SO 5 Compute Earnings Per Share.


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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.

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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 shareholders’ funds.

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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 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.

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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.

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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

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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.


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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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14-1. 14-2 CHAPTER14 Corporations: Dividends, Retained Earnings, and Income Reporting