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14-2 CHAPTER14 Corporations: Dividends, Retained Earnings, and Income Reporting

14-3 PreviewofCHAPTER14

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

14-5 Three dates: SO 1 Prepare the entries for cash dividends and stock dividends. Dividends

14-6 For a corporation to pay a cash dividend, it must have: 1. 1.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 Cash Dividends

14-7 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) Cash dividends 50,000 Dividends payable 50,000 December 22 (Date of Record) January 20 (Payment Date) SO 1 Prepare the entries for cash dividends and stock dividends. Dividends payable 50,000 Cash 50,000 No entry Dividends

14-8 Allocating Cash Dividends Between Preferred and Common Stock SO 1 Prepare the entries for cash dividends and stock dividends. Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends. Dividends

14-9 SO 1 Prepare the entries for cash dividends and stock dividends. Illustration: On December 31, 2012, 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, 2012, 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 Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000 Dividends

14-10 SO 1 Prepare the entries for cash dividends and stock dividends. * 1,000 shares x $100 par x 8% = $8,000 * ** 2012 Pfd. dividends $8,000 – declared $6,000 = $2,000 ** Illustration: At December 31, 2013, 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 Dividends

14-11 SO 1 Prepare the entries for cash dividends and stock dividends. Cash dividends 50,000 Dividends payable 50,000 Illustration: At December 31, 2013, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend. Dividends

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14-13 Pro rata distribution of the corporation’s own stock. SO 1 Prepare the entries for cash dividends and stock dividends. Results in decrease in retained earnings and increase in paid-in capital. Illustration 14-3 Dividends Stock Dividends

14-14 Reasons why corporations issue stock dividends: 1. 1.Satisfy stockholders’ dividend expectations without spending cash Increase marketability of the corporation’s stock Emphasize a portion of stockholders’ equity has been permanently reinvested in the business. SO 1 Prepare the entries for cash dividends and stock dividends. Dividends Stock Dividends

14-15   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) SO 1 Prepare the entries for cash dividends and stock dividends. * Accounting based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares. * Dividends Stock Dividends

% stock dividend is declared Stock dividends (5,000 x 10% x $40) 20,000 Common stock dividends distributable500 Paid-in capital in excess of par value 19,500 Stock issued Common stock dividends distributable500 Common stock (5,000 x 10% x $1) 500 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. SO 1 Prepare the entries for cash dividends and stock dividends. Dividends

14-17 Stockholders’ Equity with Dividends Distributable SO 1 Prepare the entries for cash dividends and stock dividends. Dividends

14-18 SO 1 Prepare the entries for cash dividends and stock dividends. Effects of Stock Dividends $ 0 Dividends

14-19 Which of the following statements about small stock dividends is true? a.A debit to Stock Dividends for the par value of the shares issued should be made. b.A small stock dividend decreases total stockholders’ equity. c.Market value per share should be assigned to the dividend shares. d.A small stock dividend ordinarily will have no effect on book value per share of stock. Question SO 1 Prepare the entries for cash dividends and stock dividends. Dividends

14-20 In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n): a.deduction from total paid-in capital and retained earnings. b.current liability. c.deduction from retained earnings. d.addition to capital stock. SO 1 Prepare the entries for cash dividends and stock dividends. Dividends Question

14-21 SO 1 Prepare the entries for cash dividends and stock dividends. Dividends  Reduces the market value of shares.  No entry recorded for a stock split.  Decrease par value and increase number of shares. Stock Split

for 1 Stock Split No Entry -- Disclosure that par is now $.50 and shares outstanding are 10,000. 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. SO 1 Prepare the entries for cash dividends and stock dividends. Dividends

14-23 SO 1 Prepare the entries for cash dividends and stock dividends. Effects of Stock Splits Dividends

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14-25   Net income increases Retained Earnings and a net loss decreases Retained Earnings.   Part of the stockholders’ claim on the total assets of the corporation.   Debit balance in Retained Earnings is identified as a deficit. SO 2 Identify the items reported in a retained earnings statement. Retained Earnings Illustration 14-9

14-26 Restrictions can result from: 1. 1.Legal restrictions Contractual restrictions Voluntary restrictions. SO 2 Identify the items reported in a retained earnings statement. Companies generally disclose retained earnings restrictions in the notes to the financial statements. Retained Earnings Restrictions Retained Earnings

14-27  Correction of an error in previously issued financial statements.  Result from: ► mathematical mistakes. ► mistakes in application of accounting principles. ► oversight or misuse of facts.  Adjustment made to the beginning balance of retained earnings. SO 2 Identify the items reported in a retained earnings statement. Prior Period Adjustments Retained Earnings

14-28 Before issuing the report for the year ended December 31, 2012, you discover a $50,000 error (net of tax) that caused the 2011 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2012? SO 2 Identify the items reported in a retained earnings statement. Retained Earnings Statement

14-29 SO 2 Identify the items reported in a retained earnings statement. Retained Earnings Statement

14-30 SO 2 Identify the items reported in a retained earnings statement. Debits and Credits to Retained Earnings Illustration Retained Earnings Statement

14-31 All but one of the following is reported in a retained earnings statement. The exception is: a.cash and stock dividends. b.net income and net loss. c.some disposals of treasury stock below cost. d.sales of treasury stock above cost. Question SO 2 Identify the items reported in a retained earnings statement. Retained Earnings Statement

14-32 SO 3 Illustration Statement Presentation and Analysis Stockholders’ Equity Presentation

14-33 Net Income Available to Common Stockholders Return on Common Stockholders’ Equity = Average Common Stockholders’ Equity SO 3 Prepare and analyze a comprehensive stockholders’ equity section. Ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders. Statement Presentation and Analysis Stockholders’ Equity Analysis

14-34 Income Statement Presentation SO 4 Describe the form and content of corporation income statements. Illustration Statement Presentation and Analysis

14-35 Income Statement Analysis Net Income minus Preferred Dividends Earnings Per Share = Weighted-Average Common Shares Outstanding SO 5 Compute Earnings Per Share. Ratio indicates the net income earned by each share of outstanding common stock. Statement Presentation and Analysis

14-36 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: a.$7.00. b.$4.90. c.$2.10. d.No correct answer is given. Question ($490,000 / 100,000 = $4.90) SO 5 Compute Earnings Per Share. Statement Presentation and Analysis

14-37 Key Points  The term reserves is used in IFRS to indicate all non – contributed (non – paid-in capital). Reserves include retained earnings and other comprehensive income items, such as revaluation surplus and unrealized gains or losses on available- for sale securities.  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.

14-38 Key Points  The accounting related to prior period adjustment is essentially the same under IFRS and GAAP. One area where IFRS and GAAP differ in reporting relates to error corrections in previously issued financial statements. While IFRS requires restatement with some exceptions, GAAP does not permit any exceptions.  The stockholders ’ equity section is essentially the same under IFRS and GAAP. However, terminology used to describe certain components is often different.  Equity is given various descriptions under IFRS, such as shareholder ’ s equity, owners ’ equity, capital and reserves, and shareholders ’ funds.

14-39 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.  The computations related to earnings per share are essentially the same under IFRS and GAAP.

14-40 Looking into 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.

14-41 The basic accounting for cash dividends and stock dividends: 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. IFRS Self-Test Questions

14-42 Which item in not considered part of reserves? a)Unrealized loss on available-for-sale investments. b)Revaluation surplus. c)Retained earnings. d)Issued shares. IFRS Self-Test Questions

14-43 Under IFRS, a statement of comprehensive income must include: a)accounts payable. b)retained earnings. c)income tax expense. d)preference stock. IFRS Self-Test Questions

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