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

2. Dividends
A dividend is a corporation’s 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.

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

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

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

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

16. 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.

17. 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.

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

19. Copyright
“Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”