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 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: 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: Cash dividends Property dividends Script (promissory note) 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 Prepare the entries for cash dividends and stock dividends Dividends Dividends Dividends require information concerning three dates: Chapter 14-6 LO 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 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 LO 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 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 (Payment Date) Chapter 14-8 Dividends payable 50,000 Cash 50,000 No LO 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 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 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 for Stock Split No Entry Disclosure that par is now $.50 and shares outstanding are 10,000 Chapter 14-23 LO 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 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 Identify the items reported in a retained earnings statement Retained Retained Earnings Earnings Restrictions 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 Identify the items reported in a retained earnings statement Prior Prior Period Period Adjustments 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 Identify the items reported in a retained earnings statement Prior Prior Period Period Adjustments Adjustments 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 Identify the items reported in a retained earnings statement Retained Retained Earnings Earnings Statement Statement Chapter 14-29 LO Identify the items reported in a retained earnings statement Retained Retained Earnings Earnings Statement Statement The company prepares the statement from the Retained Earnings account Illustration 14-13 Chapter 14-30 LO Identify the items reported in a retained earnings statement Retained Retained Earnings Earnings Statement Statement Question All but one of the following is reported in a retained earnings statement The exception is: Chapter 14-31 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 LO Identify the items reported in a retained earnings statement Statement Statement Analysis Analysis and and Presentation Presentation Illustration 14-15 Chapter 14-32 LO Prepare and analyze a comprehensive stockholders’ equity section Statement Statement Analysis Analysis and and Presentation 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 Prepare and analyze a comprehensive stockholders’ equity section Statement Statement Analysis Analysis and and Presentation Presentation Income Statement Presentation Chapter 14-34 Illustration 14-17 LO Describe the form and content of corporation income statements Statement Statement Analysis Analysis and and Presentation Presentation Income Statement Analysis Earnings Per Share = Net Income minus Preferred Dividends Weighted-Average Common Shares Outstanding This ratio indicates the net income earned by each share of outstanding common stock Chapter 14-35 LO Compute Earnings Per Share 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: Chapter 14-36 a $7.00 b $4.90 c $2.10 d No correct answer is given ($490,000 / 100,000 = $4.90) LO 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 back-up 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 .. .CHAPTER CHAPTER 14 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING Accounting Principles, Eighth Edition Chapter 14- 2 Study Study Objectives Objectives... amount per share Chapter 14- 5 LO Prepare the entries for cash dividends and stock dividends Dividends Dividends Dividends require information concerning three dates: Chapter 14- 6 LO Prepare the... (5,000 x 10% x $1) Chapter 14- 17 500 500 LO Prepare the entries for cash dividends and stock dividends Dividends Dividends Stockholders’ Equity with Dividends Distributable Chapter 14- 18 LO Prepare