1 Retained Earnings ACCTG 5120 David Plumlee

page2 net losses dividends prior period adj.(error corrections) treasury stock adj. What items or events increase RE? Undistributed Prior Earnings Retained Earnings net income prior period adj. adjustment to eliminate a deficit position in a quasi- reorganization What items or events decrease RE?

page3 Dividends What are some of the different types of dividends? cash property script liquidating stock

page4 Important Dates Date of declaration-- date dividend declared by Board of Directors retained earningsxxx dividends payablexxx Date of record -- individuals holding stock this date receive dividend Date of payment -- date dividend is actually paid What are the important dates for dividends?

page5 Property Dividend What is a property dividend? Dividends paid in non-cash assets such as stock of another company How is accounting for Stock Div. Different? 1. 1.On the date of declaration, write the asset up or down to its FMV and record the resulting gain or loss 2. 2.The dividend amount recorded is equal to the asset’s FMV

page6 Scrip and Liquidating Dividends What is a script dividend? What is a liquidating dividend? dividend is declared, but payment is promised at a later date shareholders are given a note, which may bear interest any interest accruing on the note should be charged to interest expense in the appropriate period any dividend that is not paid out of retained earnings it represents a return of capital it is charged against additional paid in capital

page7 Stock Dividends Why issue a stock dividend? Reduce stock price to increase marketability Permanently capitalize retained earnings Do stockholders benefit economically from stock dividends? More are shares outstanding, but they still own the same proportion Its total market value of the is not increased, share price should drop proportionately

page8 Recording Stock Dividends What makes a stock dividend “small?” Issuing less than a % stock of the previously outstanding stock How should you account for small vs. large stock dividends? For small, the fair value of the stock to be issued is transferred from RE. Large use par value.

page9 Stock Splits vs. Stock Div. 2 for 1 Stock Split 2 for 1 Stock Split 100% Stock Dividend # shares double What happens to the # of shares? What happens to the market price? cut in half What JE is made? Memo only; cut par Entry to transfer r/e in half Primary concern: manipulating stock price Why would management choose? Signal intent to permanently reinvest some firm’s earnings

page10 Appropriations of RE Reclassified for a specific purpose (e.g. debt covenant requirement or anticipation of a loss ) Does not involve cash Nothing can be charged against appropriated retained earnings Creation and elimination involves only unappropriated retained earnings Appropriation of retained earnings does not mean that cash will be available

page11 Appropriation Entries How do you setup appropriated R/E? Unappropriated R/Exxx Appropriated R/Exxx How do you eliminate appropriated R/E? Appropriated R/Exxx Unappropriated R/Exxx

page12 Quasi reorganizations What is a quasi reorganization? A quasi-reorganization is designed to allow the company to appear to have dissolved, paid of any creditors that want out, and reformed the company without making it go through the expense of actually going through a formal dissolution and reformation.

page13 Quasi-Reorganization Justified When... A significant deficit balance in R/E Cost basis of assets fails to reflect going-concern value Break with historical cost concept viewed as necessary Fresh start appears advantageous to all parties Approved by shareholders and creditors

page14 Quasi-Reorganization Procedures What is done with the existing asset and liability balances? Restate them to fair values and adjust RE for the difference. What is done with the deficit in RE? Eliminate it against other capital accounts paid in capital in excess of par capital stock