CHAPTER 14
CORPORATIONS:
DIVIDENDS, RETAINED
EARNINGS, AND INCOME
REPORTING
Accounting Principles, Eighth Edition
By Louis Hwang and John Burneson
Chapter
14-1
Corporations: Dividends, Retained
Earnings, and Income Reporting
Dividends
Cash dividends
Stock dividends
Stock splits
Retained
Earnings
Retained earnings
restrictions
Prior period
adjustments
Retained earnings
statement
Statement
Presentation and
Analysis
Stockholders’
Equity
Presentation
Stockholders’
Equity Analysis
Income Statement
Presentation
Income Statement
Analysis
Chapter
14-2
Dividends
A distribution of cash or stock to stockholders
on a pro rata (proportional) basis.
Types of Dividends:
1.
Cash dividends.
2. Property dividends.
3. Script (promissory note).
4. Stock dividends.
Dividends expressed: (1) as a percentage of the par or
stated value, or (2) as a dollar amount per share.
Chapter
14-3
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Dividends require information concerning three dates:
Chapter
14-4
LO 1 Prepare the entries for cash dividends and stock dividends.
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Chapter
14-5
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
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Illustration: What would be the journal entries
made by a corporation that declared a $50,000 cash
dividend on March 10, payable on April 6 to
shareholders of record on March 25?
March 10 (Declaration Date)
Retained earnings
Dividends payable
March 25 (Date of Record)
50,000
50,000
No entry
April 6 (Payment Date)
Dividends payable
Cash
Chapter
14-7
50,000
50,000
LO 1 Prepare the entries for cash dividends and stock dividends.
Cash Dividends - Preferred Stock
Cash dividends must be paid first to
preferred stockholders before any common
stockholders are paid.
Cumulative preferred stock
 Dividends in arrears and
the current year’s
dividend must be paid to
preferred stockholders
before the common
stockholders.
Chapter
14-8
Non-Cumul preferred stock
 Only the current year’s
dividend must be paid to
preferred stockholders
before the common
stockholders.
Dividends
If you are a company, which stock do you want to
offer?
If you are a shareholder, which do you want to own?
Chapter
14-9
Dividends
Exercise Arnez Corporation has outstanding 2,000
shares of $50 par value preferred stock and 100,000
shares of $10 par value common stock.
At December 31, the company declared the following
cash dividends: 2008=$8,000, 2009=$12,000, and 2010=
$28,000.
Instructions: (a) Show the allocation of dividends to
each class of stock, assuming the preferred stock
dividend is 8% and not cumulative.
Chapter
14-10
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Exercise
Arnez Corporation has outstanding 2,000 shares of $50 par value
preferred stock and 100,000 shares of $10 par value common stock.
At December 31, the company declared the following cash dividends: 2008=$8,000,
2009=$12,000, and 2010= $28,000.
Instructions: (a) Show the allocation of dividends to each class of stock, assuming
the preferred stock dividend is 8% and not cumulative.
2008
2009
2010
Dividends declared
*Allocation to preferred
Remainder to common
$
-
$
-
$
-
* 2,000 shares x $50 par x 8% = $8,000
Chapter
14-11
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Exercise
At December 31, the company declared the following cash
dividends: 2008=$8,000, 2009=$12,000, and 2010= $28,000.
(a) Show the allocation of dividends to each class of stock, assuming the
preferred stock dividend is 8% and not cumulative.
2008
Dividends declared
Allocation to preferred
Remainder to common
*
$
$
2009
2010
8,000
$ 12,000
$ 28,000
8,000
8,000
8,000
4,000
$ 20,000
-
$
* 2,000 shares x $50 par x 8% = $8,000
Chapter
14-12
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Exercise
At December 31, the company declared the following cash
dividends: 2008=$8,000, 2009=$12,000, and 2010= $28,000.
(a) Show the allocation of dividends to each class of stock, assuming the
preferred stock dividend is 8% and not cumulative.
2008
2009
2010
Dividends declared
**
Dividends in arrears
Allocation to preferred
Remainder to common
*
$
-
$
-
$
-
* 2,000 shares x $50 par x 9% = $9,000
** 2008 Pfd. dividends $9,000 – declared $8,000 = $1,000
Chapter
14-13
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Exercise (b) Show the allocation of dividends to each
class of stock, assuming the preferred stock dividend is
9% and cumulative.
2008
Dividends declared
$
8,000
2009
2010
$ 12,000
$ 28,000
Dividends in arrears
Allocation to preferred
Remainder to common
1,000
*
9,000
$
-
9,000
$
2,000
**
9,000
$ 19,000
* 2,000 shares x $50 par x 9% = $9,000
** 2008 Pfd. dividends $9,000 – declared $8,000 = $1,000
Chapter
14-14
LO 1 Prepare the entries for cash dividends and stock dividends.
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
14-15
LO 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
14-16
LO 1 Prepare the entries for cash dividends and stock dividends.
Stock Split


Additional shares of stock are issued to
stockholders according to their %
ownership
Has no effect on total paid-in capital,
retained earnings, and total stockholders’
equity. Why…?
1,000,000 shares of $80 common stock
become 2,000,000 shares of $40 common
stock.

Chapter
14-17
No journal entry – Why?
NO change in equity accounts
LO 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
14-18
LO 1 Prepare the entries for cash dividends and stock dividends.