14-1 prepared by coby harmon university of california, santa barbara westmont college

14-1

Prepared byCoby Harmon

University of California, Santa BarbaraWestmont College

14-2

Learning Objectives

After studying this chapter, you should be able to:

[1] Prepare the entries for cash dividends and stock dividends.

[2] Identify the items reported in a retained earnings statement.

[3] Prepare and analyze a comprehensive stockholders’ equity section.

[4] Describe the form and content of corporation income statements.

[5] Compute earnings per share.

14Corporations: Dividends, Retained Earnings, and Income Reporting

14-3

Preview of Chapter 14

Accounting PrinciplesEleventh Edition

Weygandt Kimmel Kieso

14-4

Distribution of cash or stock to stockholders on a pro rata

(proportional) basis.

Types of Dividends:

LO 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 (promissory note).

Dividends

14-5

For a corporation to pay a cash dividend, it must have:

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.


Dividends

Cash Dividends

14-6

Three dates:


Dividends

Illustration 14-1Key dividend dates

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)



Cash 50,000

No entry

Dividends

14-8

Allocating Cash Dividends Between Preferred and Common Stock


Holders of cumulative preferred stock must be paid any unpaid

prior-year dividends and their current year’s dividend before

common stockholders receive dividends.

Dividends

14-9 LO 1 Prepare the entries for cash dividends and stock dividends.

Illustration: On December 31, 2014, 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, 2014, the directors declare a $6,000 cash dividend.

Prepare the entry to record the declaration of the dividend.



Preferred Dividends: 1,000 shares x $100 par x 8% = $8,000

Dividends


2014 2015

Dividends declared 6,000$

Dividends in arrears

Allocation to preferred 6,000

Remainder to common -$

* 1,000 shares x $100 par x 8% = $8,000

*

** 2014 Pfd. dividends $8,000 – declared $6,000 = $2,000

**

Illustration: At December 31, 2015, 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



Dividends Payable

50,000

Illustration: At December 31, 2015, IBR declares a $50,000 cash

dividend. Prepare the entry to record the declaration of the

dividend.

Dividends


Dividends

Stock Dividends

Pro rata distribution of the corporation’s own stock.

Results in decrease in retained earnings and increase in paid-in capital.

Illustration 14-5

14-14

Reasons why corporations issue stock dividends:

1. Satisfy stockholders’ dividend expectations without

spending cash.

2. Increase marketability of the corporation’s stock.

3. Emphasize a portion of stockholders’ equity has been

permanently reinvested in the business.


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)


* 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

14-16

Illustration: Medland Corporation declares a 10% stock dividend on

its 50,000 shares of $10 par value common stock. The current fair

market value of its stock is $15 per share. Record the entry on the

declaration date:

Stock Dividends (50,000 x 10% x $15) 75,000

Common Stock Dividends Distributable 50,000

Paid-in Capital in Excess of Par 25,000

Illustration 14-3

Dividends

Statement Presentation


14-17

Common Stock Dividends Distributable 50,000

Common Stock 50,000

Illustration: Record the journal entry when Medland issues the

dividend shares.


Dividends


Effects of Stock Dividends

Dividends

Illustration 14-4

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


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.


Dividends

Question


Dividends

Issuance of additional shares to stockholders according to

their percentage ownership.

Reduces the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number of shares.

Stock Splits

Helpful Hint A stock splitchanges the par value pershare but does not affectany balances in stockholders’ equity.

Helpful Hint A stock splitchanges the par value pershare but does not affectany balances in stockholders’ equity.


Dividends

Stock Splits

Effect of stock split for stockholdersIllustration 14-5


Effects for Medland Corporation, assuming that it splits its 50,000 shares of common stock on a 2-for-1 basis.

Dividends

Illustration 14-6

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.

LO 2 Identify the items reported in a retained earnings statement.

Retained Earnings

Illustration 14-9

14-26

Restrictions can result from:

1. Legal restrictions.

2. Contractual restrictions.

3. Voluntary restrictions.


Retained Earnings Restrictions

Retained Earnings

Illustration 14-11Disclosure of restriction

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.


Prior Period Adjustments

Retained Earnings

14-28

Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$

For the Year Ended December 31, 2014Statement of Retained Earnings

Woods, Inc.

Before issuing the report for the year ended December 31, 2014, you discover a $50,000 error (net of tax) that caused the 2013 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2013. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2014?


Retained Earnings Statement

14-29

Balance, January 1, as previously reported 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1, as restated 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$

For the Year Ended December 31, 2014Statement of Retained Earnings

Woods, Inc.



14-30 LO 2 Identify the items reported in a retained earnings statement.

Debits and Credits to Retained EarningsIllustration 14-13


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



14-32 LO 3

Illustration 14-15

Statement Presentation

Illustration 14-15

14-33

Net Income Available to Common Stockholders

Return on Common

Stockholders’ Equity

=Average Common

Stockholders’ Equity

LO 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

Analysis

14-34

Income Statement Presentation

LO 4 Describe the form and content of corporation income statements.

Illustration 14-17


14-35

Income Statement Analysis

Net Income minus Preferred DividendsEarnings

Per Share =

Weighted-Average Common Shares Outstanding

LO 5 Compute Earnings Per Share.

Ratio indicates the net income

earned by each share of

outstanding common stock.


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)

LO 5 Compute Earnings Per Share.


14-37

Key Points

A Look at IFRS

LO 6 Compare the accounting for dividends, retained earnings, and income reporting under GAAP and IFRS.

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

A Look at IFRS


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

A Look at IFRS


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 to the Future

A Look at IFRS

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.

Both the IASB and FASB are working toward convergence of any

remaining differences related to earnings per share computations. This

convergence will deal with highly technical changes beyond the scope of

this textbook.


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.

A Look at IFRS

IFRS Self-Test Questions


14-42

A Look at IFRS



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.

14-43

A Look at IFRS



Under IFRS, a statement of comprehensive income must include:

a) accounts payable.

b) retained earnings.

c) income tax expense.

d) preference stock.

14-44

“Copyright © 2013 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.”

Copyright

14-1 prepared by coby harmon university of california, santa barbara westmont college

Documents