Characteristics of a Corporation
An entity separate and distinct from its owners.
Characteristics that distinguish corporations from
proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights Advantages
Ability to Acquire Capital
Continuous Life
Corporate Management
Disadvantages
Government Regulations
Additional Taxes
14-1 LO 1
LEARNING Explain how to account for cash
1
OBJECTIVE dividends.
Distribution of cash or stock to stockholders on a pro rata
(proportional to ownership) basis.
Types of Dividends:
1. Cash dividends. 3. Stock dividends.
2. Property dividends. 4. Scrip (promissory note).
Dividends are generally reported quarterly as a dollar amount
per share.
14-2 LO 1
Cash 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.
14-3 LO 1
Cash Dividends
Three dates are important: Illustration 14-1
Key dividend dates
14-4 LO 1
Cash Dividends
Illustration: On Dec. 1, the directors of Media General declare a 50
cents 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.
Dec. 1 (Declaration Date)
Cash Dividends 50,000
Dividends Payable 50,000
Dec. 22 (Date of Record) No entry
Jan. 20 (Payment Date)
Dividends Payable 50,000
Cash 50,000
14-5 LO 1
Dividend Preferences
Right to receive dividends before common stockholders.
Per share dividend amount is stated as a percentage of
the preferred stock’s par value or as a specified amount.
Cumulative Dividend
Preferred stockholders must be
paid both current-year
dividends and any unpaid prior-
year dividends before common
stockholders receive dividends.
14-6 LO 1
Dividend Preferences
CUMULATIVE DIVIDEND
Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par
value, cumulative preferred stock outstanding. Each $100 share
pays a $7 dividend (.07 x $100). The annual dividend is $35,000
(5,000 x $7 per share). If dividends are two years in arrears,
preferred stockholders are entitled to receive the following
dividends in the current year.
Illustration 14-2
Computation of total dividends to preferred stock
14-7 Advance slide in slide show to reveal dividend amounts. LO 1
Dividend Preferences
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.
14-8 LO 1
ALLOCATING CASH DIVIDENDS
Illustration: On December 31, 2017, 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, 2017, the directors declare a $6,000 cash dividend.
Prepare the entry to record the declaration of the dividend.
Cash Dividends 6,000
Dividends Payable 6,000
Preferred Dividends: 1,000 shares x $100 par x 8% = $8,000
14-9 LO 1
ALLOCATING CASH DIVIDENDS
Illustration: At December 31, 2018, IBR declares a $50,000
cash dividend. Show the allocation of dividends to each class of
stock.
2017 2018
Dividends declared $ 6,000 $ 50,000
Dividends in arrears 2,000 **
Allocation to preferred 6,000 8,000 *
Remainder to common $ - $ 40,000
* 1,000 shares x $100 par x 8% = $8,000
** 2017 Pfd. dividends $8,000 – declared $6,000 = $2,000
14-10 LO 1
ALLOCATING CASH DIVIDENDS
Illustration: At December 31, 2018, IBR declares a $50,000 cash
dividend. Prepare the entry to record the declaration of the
dividend.
Cash Dividends 50,000
Dividends Payable 50,000
14-11 LO 1
Dividends on Preferred and
DO IT! 1 Common Stock
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2017. At December 31,
2017, the company declared a $60,000 cash dividend. Determine the
dividend paid to preferred stockholders and common stockholders
under each of the following scenarios.
1. The preferred stock is noncumulative, and the company has
not missed any dividends in previous years.
Solution
Preferred stockholders are paid only this year’s dividend.
Preferred stockholders = $12,000 (2,000 x .06 x $100).
Common stockholders = $48,000 ($60,000 - $12,000).
14-12 LO 1
Dividends on Preferred and
DO IT! 1 Common Stock
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2017. At December 31,
2017, the company declared a $60,000 cash dividend. Determine the
dividend paid to preferred stockholders and common stockholders
under each of the following scenarios.
2. The preferred stock is noncumulative, and the company did
not pay a dividend in each of the two previous years.
Solution
Past unpaid dividends do not have to be paid.
Preferred stockholders = $12,000 (2,000 x .06 x $100).
Common stockholders = $48,000 ($60,000 - $12,000).
14-13 LO 1
Dividends on Preferred and
DO IT! 1 Common Stock
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2017. At December 31,
2017, the company declared a $60,000 cash dividend. Determine the
dividend paid to preferred stockholders and common stockholders
under each of the following scenarios.
3. The preferred stock is cumulative, and the company did not
pay a dividend in each of the two previous years.
Solution
Dividends that have been missed (dividends in arrears) must be paid.
Preferred stockholders = $36,000 (3 x 2,000 x .06 x $100).
Common stockholders = $24,000 ($60,000 - $36,000).
14-14 LO 1
Statement Presentation and Analysis
ANALYSIS
To illustrate, Walt Disney Company’s beginning-of-the-year and end-
of-the-year common stockholders’ equity were $31,820 and $30,753
million, respectively. Its net income was $4,687 million, and no
preferred stock was outstanding.
Illustration 14-16
Ratio shows how many dollars of net income the company earned
for each dollar invested by the common stockholders.
14-15 LO 3
LEARNING Describe the form and content of
4
OBJECTIVE corporation income statements.
Income
Statement
Presentation
Illustration 14-17
Income statement
with income taxes
14-16 LO 4
Income Statement Analysis
EPS AND PREFERRED DIVIDENDS
Net Income minus
Earnings Preferred Dividends
=
Per Share
Weighted-Average Common
Shares Outstanding
Ratio indicates the net income
earned by each share of
outstanding common stock.
14-17 LO 4
DO IT! 4 Stockholders’ Equity and EPS
(a) Compute return on common stockholders’ equity for each year.
14-18 LO 4
DO IT! 4 Stockholders’ Equity and EPS
(b) Compute earnings per share for each year.
14-19 LO 4
