Chapter
14
Corporations:
Dividends, Retained
Earnings, and Income
Reporting
Chapter
14-1
Accounting Principles, Ninth Edition
Study Objectives
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.
Chapter
14-2
Corporations: Dividends, Retained Earnings,
and Income Reporting
Dividends
Cash dividends
Stock dividends
Stock splits
Retained
Earnings
Statement
Presentation and
Analysis
Retained earnings
restrictions
Stockholders’
Equity Presentation
Prior period
adjustments
Stockholders’
Equity Analysis
Retained earnings
statement
Income Statement
Presentation
Income Statement
Analysis
Chapter
14-3
Dividends
A distribution of cash or stock to stockholders
on a pro rata (proportional) basis.
Types of Dividends:
1.
Cash dividends.
3. Stock dividends.
2. Property dividends.
Dividends expressed: (1) as a percentage of the par or
stated value, or (2) as a dollar amount per share.
Chapter
14-4
SO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Dividends require information concerning three dates:
Chapter
14-5
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:
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.
Chapter
14-6
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
Dividends payable
December 22 (Date of Record)
50,000
50,000
No entry
January 20 (Payment Date)
Dividends payable
Cash
Chapter
14-7
50,000
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.
Chapter
14-8
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
Chapter
14-9
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.
2010
Dividends declared
$
6,000
Dividends in arrears
Allocation to preferred
Remainder to common
6,000
$
-
2011
$ 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
Chapter
14-10
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
Dividends payable
Chapter
14-11
50,000
50,000
SO 1 Prepare the entries for cash dividends and stock dividends.
Chapter
14-12
Dividends
Stock Dividends
Illustration 14-3
Pro rata distribution of the corporation’s own stock.
Results in decrease in retained earnings and increase in paid-in capital.
Chapter
14-13
SO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Stock Dividends
Reasons why corporations issue stock dividends:
1. To satisfy stockholders’ dividend expectations
without spending cash.
2. To increase the marketability of the corporation’s
stock.
3. To emphasize that a portion of stockholders’ equity
has been permanently reinvested in the business.
Chapter
14-14
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.
Chapter
14-15
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)
Common stock dividends distributable
Additional paid-in capital
20,000
500
19,500
Stock issued
Common stock div. distributable
Common stock (5,000 x 10% x $1)
Chapter
14-16
500
500
SO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Stockholders’ Equity with Dividends Distributable
HH Inc.
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Common stock, $1 par, 5,000 issued
and outstanding
Common stock dividends distributable
Paid-in capital in excess of par
Retained earnings
Total stockholders' equity
Chapter
14-17
$
5,000
500
64,500
90,000
$ 160,000
SO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Effects of Stock Dividends
Before
Dividend
HH Inc.
Stockholders' equity
Paid-in capital
Common stock, $1 par, 5,000 issued
and outstanding
Paid-in capital in excess of par
Retained earnings
Total stockholders' equity
Outstanding shares
Book value per share
Chapter
14-18
5,000
45,000
110,000
$ 160,000
$
$
5,000
32
After
Dividend
Net
Change
5,500
64,500
90,000
$ 160,000
$ 500
19,500
(20,000)
$
$
$
0
5,500
29
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. A debit to Retained Earnings 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.
Chapter
14-19
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):
a. deduction from total paid-in capital and
retained earnings.
b. current liability.
c. deduction from retained earnings.
d. addition to capital stock.
Chapter
14-20
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.
Chapter
14-21
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.
Chapter
14-22
SO 1 Prepare the entries for cash dividends and stock dividends.
Chapter
14-23
Dividends
Effects of Stock Splits
HH Inc.
Before
Split
Stockholders' equity
Paid-in capital
Common stock
Paid-in capital in excess of par
Retained earnings
Total stockholders' equity
Outstanding shares
Book value per share
Chapter
14-24
$
5,000
45,000
110,000
$ 160,000
$
5,000
32
After
Split
$
5,000
45,000
110,000
$ 160,000
Net
Change
$
$
-
10,000
$
16
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.
Chapter
14-25
SO 2 Identify the items reported in a retained earnings statement.
Retained Earnings Restrictions
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Companies generally disclose retained earnings
restrictions in the notes to the financial statements.
Chapter
14-26
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
Chapter
14-27
SO 2 Identify the items reported in a retained earnings statement.
Prior Period Adjustments
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2010
Balance, January 1
Net income
Dividends
Balance, December 31
$
$
1,050,000
360,000
(300,000)
1,110,000
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?
Chapter
14-28
SO 2 Identify the items reported in a retained earnings statement.
Retained Earnings Statement
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2010
Balance, January 1, as previously reported
Prior period adjustment - error correction
Balance, January 1, as restated
Net income
Dividends
Balance, December 31
Chapter
14-29
$
$
1,050,000
(50,000)
1,000,000
360,000
(300,000)
1,060,000
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
Chapter
14-30
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:
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.
Chapter
14-31
SO 2 Identify the items reported in a retained earnings statement.
Statement Analysis and Presentation
Illustration 14-15
Chapter
14-32
SO 3 Prepare and analyze a comprehensive stockholders’ equity section.
Statement Analysis and Presentation
Stockholders’ Equity Analysis
Return on
Common
Stockholders’
Equity
=
Net Income Available
to Common Stockholders
Average Common
Stockholders’ Equity
This ratio shows how many dollars of net income the
company earned for each dollar invested by the
stockholders.
Chapter
14-33
SO 3 Prepare and analyze a comprehensive stockholders’ equity section.
Statement Analysis and Presentation
Income
Statement
Presentation
Chapter
14-34
Illustration 14-17
SO 4 Describe the form and content of corporation income statements.
Statement Analysis and Presentation
Income Statement Analysis
Earnings
Per Share
=
Net Income minus
Preferred Dividends
Weighted-Average Common
Shares Outstanding
This ratio indicates the net income earned by each
share of outstanding common stock.
Chapter
14-35
SO 5 Compute Earnings Per Share.
Statement Analysis and Presentation
Question
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.
($490,000 / 100,000 = $4.90)
c. $2.10.
d. No correct answer is given.
Chapter
14-36
SO 5 Compute Earnings Per Share.
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Chapter
14-37