CHAPTER 14 CORPORATIONS DIVIDENDS RETAINED EARNINGS AND INCOME

CHAPTER 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING Accounting Principles, Eighth Edition By Louis Hwang and John Burneson Chapter 14 -1

Corporations: Dividends, Retained Earnings, and Income Reporting Dividends Cash dividends Stock splits Chapter 14 -2 Retained Earnings Retained earnings restrictions Prior period adjustments Retained earnings statement Statement Presentation and Analysis Stockholders’ Equity Presentation Stockholders’ Equity Analysis Income Statement Presentation Income Statement Analysis

Dividends A distribution of cash or stock to stockholders on a pro rata (proportional) basis. Types of Dividends: 1. Cash dividends. 2. Property dividends. 3. Script (promissory note). 4. Stock dividends. Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share. Chapter 14 -3 LO 1 Prepare the entries for cash dividends and stock dividends.

Dividends require information concerning three dates: Chapter 14 -4 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: Chapter 14 -6 1. Retained earnings - Payment of cash dividends from retained earnings is legal in all states. 2. Adequate cash. 3. A declaration of dividends by the Board of Directors. LO 1 Prepare the entries for cash dividends and stock 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? s w o l f March 10 (Declaration Date) sh a c n o t c e f f Retained earnings 50, 000 No e Dividends payable 50, 000 March 25 (Date of Record) April 6 (Payment Date) Chapter 14 -7 No entry Dividends payable S n o t c Cash fe f e o N u q E s er d 50, 000 l o H t 50, 000 LO 1 Prepare the entries for cash dividends and stock dividends.

Cash Dividends - Preferred Stock Cash dividends must be paid first to preferred stockholders before any common stockholders are paid. Cumulative preferred stock Non-Cumul preferred stock l Dividends in arrears and l Only the current year’s dividend must be paid to preferred stockholders before the common stockholders. Chapter 14 -8

Dividends If you are a company, which stock do you want to offer? If you are a shareholder, which do you want to own? Chapter 14 -9

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: 2008=$8, 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 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: 2008=$8, 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. * * 2, 000 shares x $50 par x 8% = $8, 000 Chapter 14 -11 LO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Exercise At December 31, the company declared the following cash dividends: 2008=$8, 000, 2009=$12, 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 Chapter 14 -12 LO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Exercise At December 31, the company declared the following cash dividends: 2008=$8, 000, 2009=$12, 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 Chapter 14 -13 LO 1 Prepare the entries for cash dividends and stock dividends.

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 Chapter 14 -14 LO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Stock Dividends Illustration 14 -3 Pro rata distribution of the corporation’s own stock. Results in decrease in retained earnings and increase in paid-in capital. Chapter 14 -15 LO 1 Prepare the entries for cash dividends and stock 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 -16 LO 1 Prepare the entries for cash dividends and stock dividends.

Stock Split l l 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 shares of $80 common stock become 2, 000 shares of $40 common stock. l Chapter 14 -17 No journal entry – Why? NO change in equity accounts LO 1 Prepare the entries for cash dividends and stock 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 -18 LO 1 Prepare the entries for cash dividends and stock dividends.