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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 14-1 CHAPTER CHAPTER 14 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING Accounting Principles, Eighth Edition Chapter 14-2 Study Objectives Study Objectives Prepare the entries for cash dividends and stock dividends Identify the items reported in a retained earnings statement Prepare and analyze a comprehensive stockholders’ equity section. Describe the form and content of corporation income statements Compute earnings per share Chapter 14-3 Corporations: Dividends, Retained Earnings, and Corporations: Dividends, Retained Earnings, and Income Reporting Income 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: Cash dividends Script (promissory note) Property dividends 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: Retained earnings Payment of cash dividends from retained earnings is legal in all states Adequate cash A declaration of dividends by the Board of Directors Chapter 14-7 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 Dividends payable 50,000 March 25 (Date of Record) 50,000 No entry April 6 (Payment Date) Dividends payable Cash Chapter 14-8 50,000 50,000 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 prioryear 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 Exercise 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 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 Earnings Retained 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 Retained Earnings Restrictions Retained Earnings Restrictions Restrictions can result from: Legal restrictions Contractual restrictions Voluntary restrictions Companies generally disclose retained earnings restrictions in the notes to the financial statements Chapter 14-26 LO 2 Identify the items reported in a retained earnings statement Prior Period Adjustments Prior Period Adjustments Corrections of Errors Result from: mathematical mistakes mistakes in application of accounting principles oversight or misuse of facts Corrections treated as prior period adjustments Adjustment made to the beginning balance of retained earnings Chapter 14-27 LO 2 Identify the items reported in a retained earnings statement Prior Period Adjustments Prior Period Adjustments Woods, Inc Statement of Retained Earnings For the Year Ended December 31, 2008 Balance, January Net income Dividends Balance, December 31 $ $ 1,050,000 360,000 (300,000) 1,110,000 Before issuing the report for the year ended December 31, 2008, you discover a $50,000 error (net of tax) that caused the 2007 inventory to be overstated (overstated inventory caused COGS 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? Chapter 14-28 LO 2 Identify the items reported in a retained earnings statement Retained Earnings Statement Retained Earnings Statement Woods, Inc Statement of Retained Earnings For the Year Ended December 31, 2008 Balance, January 1, as previously reported Prior period adjustment - error correction Balance, January 1, as restated Net income Dividends Balance, December 31 Chapter 14-29 $ $ 1,050,000 (50,000) 1,000,000 360,000 (300,000) 1,060,000 LO 2 Identify the items reported in a retained earnings statement Retained Earnings Statement Retained Earnings Statement The company prepares the statement from the Retained Earnings account Illustration 1413 Chapter 14-30 LO 2 Identify the items reported in a retained earnings statement Retained Earnings Statement Retained Earnings Statement Question 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 Chapter 14-31 LO 2 Identify the items reported in a retained earnings statement Statement Analysis and Presentation Statement Analysis and Presentation Illustration 1415 Chapter 14-32 LO 3 Prepare and analyze a comprehensive stockholders’ equity section Statement Analysis and Presentation Statement Analysis and Presentation Stockholders’ Equity Analysis Return on Common Stockholders’ Equity = Net Income Available to Common Stockholders Average Common Stockholders’ Equity This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders Chapter 14-33 LO 3 Prepare and analyze a comprehensive stockholders’ equity section Statement Analysis and Presentation Statement Analysis and Presentation Income Statement Presentation Chapter 14-34 Illustration 1417 LO 4 Describe the form and content of corporation income statements Statement Analysis and Presentation Statement Analysis and Presentation Income Statement Analysis Net Income minus Preferred Dividends Earnings Per Share = WeightedAverage Common Shares Outstanding This ratio indicates the net income earned by each share of outstanding common stock Chapter 14-35 LO 5 Compute Earnings Per Share Statement Analysis and Presentation Statement Analysis and 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 b $4.90. c $2.10 ($490,000 / 100,000 = $4.90) d No correct answer is given Chapter 14-36 LO 5 Compute Earnings Per Share Copyright Copyright “Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 14-37 ... Describe the form? ?and? ?content of corporation? ?income? ?statements Compute earnings per share Chapter 14-3 Corporations:? ?Dividends,? ?Retained? ?Earnings,? ?and? ? Corporations:? ?Dividends,? ?Retained? ?Earnings,? ?and? ? Income? ?Reporting Income? ?Reporting. . .CHAPTER? ? CHAPTER? ?14 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING Accounting? ?Principles, Eighth Edition Chapter 14-2 Study Objectives Study Objectives... LO 1 Prepare the entries for cash dividends? ?and? ?stock dividends Retained? ?Earnings Retained? ?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