14 Corporations: Dividends, Retained Earnings, and Income Reporting Learning Objectives 14-1 Explain how to account for cash dividends Explain how to account for stock dividends and splits Prepare and analyze a comprehensive stockholders’ equity section Describe the form and content of corporation income statements LEARNING OBJECTIVE Explain how to account for cash dividends Distribution of cash or stock to stockholders on a pro rata (proportional to ownership) basis Types of Dividends: Cash dividends Stock dividends Property dividends Scrip (promissory note) Dividends are generally reported quarterly as a dollar amount per share 14-2 LO Cash Dividends For a corporation to pay a cash dividend, it must have: 14-3 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 Cash Dividends Three dates are important: Illustration 14-1 Key dividend dates 14-4 LO 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 (Declaration Date) Cash Dividends 50,000 Dividends Payable Dec 22 (Date of Record) 50,000 No entry Jan 20 (Payment Date) Dividends Payable Cash 14-5 50,000 50,000 LO 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 prioryear dividends before common stockholders receive dividends 14-6 LO 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 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 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 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 $ 50,000 2,000 ** 8,000 * $ 40,000 14-10 * 1,000 shares x $100 par x 8% = $8,000 ** 2017 Pfd dividends $8,000 – declared $6,000 = $2,000 LO DO IT! Retained Earnings Statement Prepare a retained earnings statement for 2017 14-39 Advance slide in slide show to reveal the missing amounts LO LEARNING OBJECTIVE Describe the form and content of corporation income statements Income Statement Presentation Illustration 14-17 Income statement with income taxes 14-40 LO Income Statement Analysis EPS AND PREFERRED DIVIDENDS Net Income minus Earnings Per Share Preferred Dividends = Weighted-Average Common Shares Outstanding Ratio indicates the net income earned by each share of outstanding common stock 14-41 LO Income Statement Analysis 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: 14-42 a $7.00 b $4.90 c $2.10 d ($490,000 / 100,000 = $4.90) No correct answer is given LO People, Planet, and Profit Insight 14-43 LO DO IT! Stockholders’ Equity and EPS (a) Compute return on common stockholders’ equity for each year 14-44 LO DO IT! Stockholders’ Equity and EPS (b) Compute earnings per share for each year 14-45 LO A Look at IFRS LEARNING OBJECTIVE Compare the accounting for dividends, retained earnings, and income reporting under GAAP and IFRS Key Points Similarities The accounting related to prior period adjustment is essentially the same under IFRS and GAAP The stockholders’ equity section is essentially the same under IFRS and GAAP However, terminology used to describe certain components is often different These differences are discussed in Chapter 13 14-46 LO A Look at IFRS 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 Regardless of which approach is reported, income tax expense is required to be reported 14-47 The computations related to earnings per share are essentially the same under IFRS and GAAP LO A Look at IFRS Key Points Differences Under IFRS, the term reserves is used to describe all equity accounts other than those arising from contributed (paidin) capital This would include, for example, reserves related to retained earnings, asset revaluations, and fair value differences 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 Equity is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves, and share holders’ funds 14-48 LO A Look at IFRS Looking to 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 Both the IASB and FASB are working toward convergence of any remaining differences related to earnings per share computations 14-49 LO A Look at IFRS IFRS Self-Test Questions The basic accounting for cash dividends and stock dividends: 14-50 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 LO A Look at IFRS IFRS Self-Test Questions Under IFRS, a statement of comprehensive income must include: 14-51 a) accounts payable b) income tax expense c) retained earnings d) preference stock LO A Look at IFRS IFRS Self-Test Questions Earnings per share computations related to IFRS and GAAP: 14-52 a) are essentially similar b) result in an amount referred to as earnings per share c) must deduct preferred (preference) dividends when computing earnings per share d) All of the answer choices are correct LO Copyright “Copyright © 2015 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.” 14-53 ... Stock 14- 18 50,000 50,000 LO Stock Dividends EFFECTS OF STOCK DIVIDENDS Illustration 14- 5 14- 19 LO Stock Dividends Question Which of the following statements about small stock dividends is true? 14- 20... balances in in stockholders’ stockholders’equity equity 14- 22 LO Stock Splits Effect of 4-for-1 stock split for stockholders Illustration 14- 6 14- 23 LO Stock Splits Effects for Medland Corporation,... Illustration 14- 11 Disclosure of restriction 14- 29 LO Retained Earnings PRIOR PERIOD ADJUSTMENTS Correction of an error in previously issued financial statements Result from: 14- 30 ► mathematical