CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING

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CHAPTER 14

• CORPORATIONS DIVIDENDS, RETAINED EARNINGS, AND
  INCOME REPORTING

Accounting Principles, Eighth Edition
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Corporations Dividends, Retained Earnings, and
Income Reporting
Dividends
Retained Earnings
Statement Presentation and Analysis

• Cash dividends
• Stock dividends
• Stock splits

• Retained earnings restrictions
• Prior period adjustments
• Retained earnings statement

• Stockholders Equity Presentation
• Stockholders Equity Analysis
• Income Statement Presentation
• Income Statement Analysis

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Dividends
A distribution of cash or stock to stockholders
on a pro rata (proportional) basis. Types of
Dividends

1. Cash dividends.
2. Property dividends.

1. Script (promissory note).
2. Stock dividends.

Dividends expressed (1) as a percentage of the
par or stated value, or (2) as a dollar amount
per share.
LO 1 Prepare the entries for cash dividends and
stock dividends.
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Dividends

• Cash Dividends
• For a corporation to pay a cash dividend, it must
  have
• Retained earnings
• Adequate cash.
• A declaration of dividends

LO 1 Prepare the entries for cash dividends and
stock dividends.
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Dividends
Dividends require information concerning three
dates
LO 1 Prepare the entries for cash dividends and
stock dividends.
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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)
No effect on cash flows
Retained earnings 50,000
Dividends payable 50,000
March 25 (Date of Record) No entry
April 6 (Payment Date)
Dividends payable 50,000
No effect on StHolders Equ
Cash 50,000
LO 1 Prepare the entries for cash dividends and
stock dividends.
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Cash Dividends - Preferred StockCash dividends
must be paid first to preferred stockholders
before any common stockholders are paid.

• Cumulative preferred stock
• Dividends in arrears and the current years
  dividend must be paid to preferred stockholders
  before the common stockholders.

• Non-Cumul preferred stock
• Only the current years dividend must be paid to
  preferred stockholders before the common
  stockholders.

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Dividends
If you are a company, which stock do you want to
offer? Why? If you are a shareholder, which do
you want to own? Why?
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Dividends
Exercise Arnez Corporation has outstanding
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 20088,000,
200912,000, 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.
LO 1 Prepare the entries for cash dividends and
stock dividends.
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Dividends
Exercise Arnez Corporation has outstanding
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 20088,000,
200912,000, 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.
2,000 shares x 50 par x 8 8,000
LO 1 Prepare the entries for cash dividends and
stock dividends.
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Dividends
Exercise At December 31, the company declared
the following cash dividends 20088,000,
200912,000, and 2010 28,000. (a) Show the
allocation of dividends to each class of stock,
assuming the preferred stock dividend is 8 and
not cumulative.

2,000 shares x 50 par x 8 8,000
LO 1 Prepare the entries for cash dividends and
stock dividends.
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Dividends
Exercise At December 31, the company declared
the following cash dividends 20088,000,
200912,000, and 2010 28,000. (a) Show the
allocation of dividends to each class of stock,
assuming the preferred stock dividend is 8 and
not cumulative.


2,000 shares x 50 par x 9 9,000
2008 Pfd. dividends 9,000 declared 8,000
1,000
LO 1 Prepare the entries for cash dividends and
stock dividends.
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Dividends
Exercise (b) Show the allocation of dividends
to each class of stock, assuming the preferred
stock dividend is 9 and cumulative.


2,000 shares x 50 par x 9 9,000
2008 Pfd. dividends 9,000 declared 8,000
1,000
LO 1 Prepare the entries for cash dividends and
stock dividends.
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Dividends

• Stock Dividends
• Pro rata distribution of the corporations own
  stock.

Illustration 14-3
Results in decrease in retained earnings and
increase in paid-in capital.
LO 1 Prepare the entries for cash dividends and
stock dividends.
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Dividends

• Stock Dividends
• Reasons why corporations issue stock dividends
• To satisfy stockholders dividend expectations
  without spending cash.
• To increase the marketability of the
  corporations stock.
• To emphasize that a portion of stockholders
  equity has been permanently reinvested in the
  business.

LO 1 Prepare the entries for cash dividends and
stock dividends.
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Stock Split

• Additional shares of stock are issued to
  stockholders according to their ownership
• Has no effect on total paid-in capital, retained
  earnings, and total stockholders equity. Why?
  
• 1,000,000 shares of 80 common stock become
  2,000,000 shares of 40 common stock.
• No journal entry Why?
• NO change in equity accounts

LO 1 Prepare the entries for cash dividends and
stock dividends.
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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.
LO 1 Prepare the entries for cash dividends and
stock dividends.