CH 14
CH 14
CH 14
Corporations:
Dividends, Retained
Earnings, and Income
Reporting
Chapter
14-1
Study
Study Objectives
Objectives
Chapter
14-2
Corporations:
Corporations: Dividends,
Dividends, Retained
Retained
Earnings,
Earnings, and
and Income
Income Reporting
Reporting
Statement
Retained
Dividends Presentation and
Earnings
Analysis
Chapter
14-3
Dividends
Dividends
Types of Dividends:
1. Cash dividends. 3. Stock dividends.
2. Property
dividends.
Dividends expressed: (1) as a percentage of the par
or stated value, or (2) as a dollar amount per share.
Chapter
14-4 SO 1 Prepare the entries for cash dividends and stock
Dividends
Dividends
Cash Dividends
For a corporation to pay a cash dividend, it must
have:
2. Adequate cash.
the declaration date, (2) the record date, and (3) the payment date.
.On the declaration date, the board of directors formally declares the
cash dividend and announces it to stockholders. Declaration of a cash
dividend commits the corporation to a legal obligation. The company
makes an entry to recognize the decrease in retained earnings and the
increase in the liability Dividends Payable.
The record date The purpose of the record date is to identify the
persons or entities that will receive the dividends, not to determine the
amount
Chapter
of the dividends liability
14-6
Chapter
14-7
Dividends
Dividends
Chapter
14-8
January 20 (Payment Date)
On the payment date, the company mails dividend checks to the
stockholders and records the payment of the dividend. Assuming that the
payment date is January 20 for Media General, the entry on that date is:
Chapter
14-9
Dividends
Dividends
Chapter
14-12
The entry to record the declaration of the dividend
is:
Chapter
14-16
Stock
Stock Dividends
Dividends
When a company issues a stock dividends, it rewards
shareholders with additional shares of stock for each share they
already own rather than paying them in cash. The amount of stock
dividends paid out depends on the number of shares an investor owns,
where one dividend equals a fraction of a share.
For instance, an investor who owns 100 shares receives a total of 10
additional shares if the issuing company distributes a 10% stock
dividend. A stock dividend results in an issuance equal to or less
than 25% of outstanding shares.
When a company issues a stock dividend, an amount equivalent to the
value of the issued shares is deducted from retained earnings and
capitalized to the paid-in capital account.
Chapter
14-17
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
14-18
Dividends
Dividends
Question
Which of the following statements about small
stock dividends is true?
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.
Chapter
14-24 SO 1 Prepare the entries for cash dividends and stock
Dividends
Dividends
Question
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.
Chapter
14-25 SO 1 Prepare the entries for cash dividends and stock
EFFECTS OF STOCK DIVIDENDS
How do stock dividends affect stockholders’ equity? They change the
composition of stockholders’ equity, because they transfer to paid-in
capital a portion of retained earnings. . However, total stockholders’ equity
remains the same
Chapter
14-28
2
Chapter
14-29
April 1 Declared a $1.50 cash dividend per share to stockholders of record
on April 15, payable May
May 1 Paid the dividend declared in April.
Journalize the transactions
Chapter
14-30
Mensa Corporation has 3,000 shares of 7%, $100 par value preferred
stock outstanding at December 31, 2010. At December 31, 2010, the
company declared a $105,000 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.
2) The preferred stock is noncumulative, and the company did not pay
a dividend in each of the two previous years.
3) The preferred stock is cumulative, and the company did not pay a
dividend in each of the two previous years.
Chapter
14-31
Chapter
14-32
Retained
Retained Earnings
Earnings
Retained earnings is net income that a company retains
for use in the business.
Chapter
14-33
Retained
Retained Earnings
Earnings
Chapter
14-34
Retained
Retained Earnings
Earnings Restrictions
Restrictions
The balance in retained earnings is generally available for
dividend declarations. In some cases, there may be retained
earnings restrictions. These make a portion of the retained
earnings balance currently unavailable for dividends
2. Contractual restrictions.
3. Voluntary restrictions.
Companies generally disclose retained earnings
Chapterrestrictions in the notes to the financial
14-35
Prior
Prior Period
Period Adjustments
Adjustments
Corrections of Errors
Result from:
mathematical mistakes
mistakes in application of accounting
principles
oversight or misuse of facts
Chapter
14-37
Prior
Prior Period
Period Adjustments
Adjustments
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2010
Before issuing the report for the year ended December 31, 2010, you
discover a $50,000 error (net of tax) that caused the 2009 inventory to be
overstated (overstated inventory caused COGS to be lower and thus net
income to be higher in 2009. Would this discovery have any impact on
the reporting of the Statement of Retained Earnings for 2010?
Chapter
14-38 SO 2 Identify the items reported in a retained earnings
Retained
Retained Earnings
Earnings Statement
Statement
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2010
Chapter
14-39
Vega Corporation has retained earnings of $5,130,000 on January 1,
2010. During the year, Vega earned $2,000,000 of net income. It
declared and paid a $250,000 cash dividend. In 2010, Vega recorded an
adjustment of $180,000 due to the understatement (from a
mathematical error) of 2009 depreciation expense. Prepare a retained
earnings statement for 2010.
Chapter
14-40
Retained
Retained Earnings
Earnings Statement
Statement
Chapter
14-41 SO 2 Identify the items reported in a retained earnings
Retained
Retained Earnings
Earnings Statement
Statement
Chapter
14-42 SO 3 Prepare and analyze a comprehensive stockholders’ equity
The balance in retained earnings on January 1, 2008, for
Ettenger Inc, was $600,000. During the
year, the corporation paid cash dividends of $70,000 and
distributed a stock dividend of $8,000.
In addition, the company determined that it had
overstated its depreciation expense in prior years
by $50,000. Net income for 2008 was $100,000
Chapter
14-43
Statement
StatementAnalysis
Analysisand
andPresentation
Presentation
This ratio shows how many dollars of net income the company
Chapter earned for each dollar invested by the stockholders.
14-44
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. The return on common stockholders’ equity
ratio is computed as follows
Chapter
14-45
Statement
Statement Analysis
Analysis and
and Presentation
Presentation
Income Statement Analysis
The existence of preferred dividends slightly complicates the
calculation of EPS. When a corporation has both preferred and
common stock, we must subtract the current year’s preferred dividend
from net income, to arrive at income available to common
stockholders.
Net Income minus
Preferred Dividends
Earnings
Per Share =
Weighted-Average Common
Shares Outstanding
This ratio indicates the net income earned by
each share of outstanding common stock.
Chapter
14-46
To illustrate, assume that Rally Inc. reports net income of $211,000 on
its 102,500 weighted-average common shares. During the year it also
declares a $6,000 dividend on its preferred stock. Therefore, the amount
Rally has available for common stock dividends is $205,000 ($211,000 -
$6,000).
Earnings per share is $2 ($205,000 / 102,500).
If the preferred stock is cumulative, Rally deducts the dividend for the
current year, whether or not it is declared. Remember that companies
report earnings per share only for common stock.
Chapter
14-47
Statement
Statement Analysis
Analysis and
and Presentation
Presentation
Question
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. ($490,000 / 100,000 = $4.90)
b. $4.90.
c. $2.10.
d. No correct answer is given.
Chapter
14-48 SO 5 Compute Earnings Per Share.
Chapter
14-49
Chapter
14-50
Chapter
14-51