Accounting Principles, Ninth Edition Chapter 14 Corporations: Dividends, Retained Earnings, and Income Reporting Accounting Principles, Ninth Edition

Study 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. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Corporations: Dividends, Retained Earnings, and Income Reporting 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 Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

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

Dividends Dividends require information concerning three dates: SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Cash Dividends For a corporation to pay a cash dividend, it must have: 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. SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Illustration: On Dec. 1, the directors of Media General declare a 50¢ 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? December 1 (Declaration Date) Retained earnings 50,000 Dividends payable 50,000 December 22 (Date of Record) No entry January 20 (Payment Date) Dividends payable 50,000 Cash 50,000 SO 1 Prepare the entries for cash dividends and stock 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. SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Illustration: On December 31, 2010, 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, 2010, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend. Retained earnings 6,000 Dividends payable 6,000 Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000 SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Illustration: At December 31, 2011, 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 * 1,000 shares x $100 par x 8% = $8,000 ** 2010 Pfd. dividends $8,000 – declared $6,000 = $2,000 SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Illustration: At December 31, 2011, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend. Retained earnings 50,000 Dividends payable 50,000 SO 1 Prepare the entries for cash dividends and stock dividends.

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

Dividends Stock Dividends Reasons why corporations issue stock dividends: To satisfy stockholders’ dividend expectations without spending cash. To increase the marketability of the corporation’s stock. To emphasize that a portion of stockholders’ equity has been permanently reinvested in the business. SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Size of Stock Dividends Small stock dividend (less than 20–25% of the corporation’s issued stock, recorded at fair market value) Large stock dividend (greater than 20–25% of issued stock, recorded at par value) * * This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares. SO 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. 10% stock dividend is declared Retained earnings (5,000 x 10% x $40) 20,000 Common stock dividends distributable 500 Additional paid-in capital 19,500 Stock issued Common stock div. distributable 500 Common stock (5,000 x 10% x $1) 500 SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Stockholders’ Equity with Dividends Distributable SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Effects of Stock Dividends $ 0 $ 0 SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Question Which of the following statements about small stock dividends is true? A debit to Retained Earnings for the par value of the shares issued should be made. A small stock dividend decreases total stockholders’ equity. Market value per share should be assigned to the dividend shares. A small stock dividend ordinarily will have no effect on book value per share of stock. SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Question In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n): deduction from total paid-in capital and retained earnings. current liability. deduction from retained earnings. addition to capital stock. SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Stock Split Reduces the market value of shares. No entry recorded for a stock split. Decrease par value and increase number of shares. SO 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. SO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Effects of Stock Splits SO 1 Prepare the entries for cash dividends and stock dividends.

Retained 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. SO 2 Identify the items reported in a retained earnings statement.

Retained Earnings Restrictions Restrictions can result from: Legal restrictions. Contractual restrictions. Voluntary restrictions. Companies generally disclose retained earnings restrictions in the notes to the financial statements. SO 2 Identify the items reported in a retained earnings statement.

Prior Period 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 SO 2 Identify the items reported in a retained earnings statement.

Prior Period Adjustments Before issuing the report for the year ended December 31, 2010, you discover a $50,000 error (net of tax) that caused the 2009 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2009. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2010? SO 2 Identify the items reported in a retained earnings statement.

Retained Earnings Statement SO 2 Identify the items reported in a retained earnings statement.

Retained Earnings Statement The company prepares the statement from the Retained Earnings account. Illustration 14-13 SO 2 Identify the items reported in a retained earnings statement.

Retained Earnings Statement Question All but one of the following is reported in a retained earnings statement. The exception is: cash and stock dividends. net income and net loss. some disposals of treasury stock below cost. sales of treasury stock above cost. SO 2 Identify the items reported in a retained earnings statement.

Statement Analysis and Presentation Illustration 14-15 SO 3 Prepare and analyze a comprehensive stockholders’ equity section.

Return on Common Stockholders’ Equity Statement Analysis and Presentation Stockholders’ Equity Analysis Net Income Available to Common Stockholders Return on Common Stockholders’ Equity = Average Common Stockholders’ Equity This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders. SO 3 Prepare and analyze a comprehensive stockholders’ equity section.

Income Statement Presentation Statement Analysis and Presentation Income Statement Presentation Illustration 14-17 SO 4 Describe the form and content of corporation income statements.

Income Statement Analysis Statement Analysis and Presentation Income Statement Analysis Net Income minus Preferred Dividends Earnings Per Share = Weighted-Average Common Shares Outstanding This ratio indicates the net income earned by each share of outstanding common stock. SO 5 Compute Earnings Per Share.

Question Statement Analysis and Presentation 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: $7.00. $4.90. $2.10. No correct answer is given. ($490,000 / 100,000 = $4.90) SO 5 Compute Earnings Per Share.

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