Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
14-1
14
Corporations: Dividends,
Retained Earnings, and
Income Reporting
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.
14-2
Preview of Chapter 14
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
14-3
Dividends
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.
4.
Scrip (promissory note).
Dividends expressed: (1) as a percentage of the par or stated
value, or (2) as a dollar amount per share.
14-4
LO 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.
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LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Three dates:
14-6
Illustration 14-1
Key dividend dates
LO 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)
Cash Dividends
50,000
Dividends Payable
December 22 (Date of Record)
50,000
No entry
January 20 (Payment Date)
Dividends Payable
Cash
14-7
50,000
50,000
LO 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 and their current year’s dividend before
common stockholders receive dividends.
14-8
LO 1 Prepare the entries for cash dividends and stock dividends.
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.
Cash Dividends
Dividends Payable
6,000
6,000
Preferred Dividends: 1,000 shares x $100 par x 8% = $8,000
14-9
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Illustration: At December 31, 2015, IBR declares a $50,000
cash dividend. Show the allocation of dividends to each class of
stock.
2014
Dividends declared
$
2015
6,000
Dividends in arrears
Allocation to preferred
Remainder to common
6,000
$
-
$ 50,000
2,000 **
8,000 *
$ 40,000
* 1,000 shares x $100 par x 8% = $8,000
** 2014 Pfd. dividends $8,000 – declared $6,000 = $2,000
14-10
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Illustration: At December 31, 2015, IBR declares a $50,000 cash
dividend. Prepare the entry to record the declaration of the
dividend.
Cash Dividends
Dividends Payable
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50,000
50,000
LO 1 Prepare the entries for cash dividends and stock dividends.
14-12
Dividends
Stock Dividends
Pro rata distribution of the corporation’s own stock.
Illustration 14-5
Results in decrease in retained earnings and increase in paid-in capital.
14-13
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Stock Dividends
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.
14-14
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
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)
* Accounting based on the assumption that a small stock dividend will
have little effect on the market price of the outstanding shares.
14-15
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
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)
Common Stock Dividends Distributable
50,000
Paid-in Capital in Excess of Par
25,000
Statement Presentation
14-16
75,000
Illustration 14-3
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Illustration: Record the journal entry when Medland issues the
dividend shares.
Common Stock Dividends Distributable
Common Stock
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50,000
50,000
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Effects of Stock Dividends
Illustration 14-4
14-18
LO 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 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.
14-19
LO 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.
14-20
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Stock Splits

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.
Helpful Hint A stock split
changes the par value per
share but does not affect
any balances in
stockholders’ equity.
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LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Stock Splits
Effect of stock split for stockholders
Illustration 14-5
14-22
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Effects for Medland Corporation, assuming that it splits its
50,000 shares of common stock on a 2-for-1 basis.
Illustration 14-6
14-23
LO 1 Prepare the entries for cash dividends and stock dividends.
14-24
Retained Earnings

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.
Illustration 14-9
14-25
LO 2 Identify the items reported in a retained earnings statement.
Retained Earnings
Retained Earnings Restrictions
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
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Illustration 14-11
Disclosure of restriction
LO 2 Identify the items reported in a retained earnings statement.
Retained Earnings
Prior Period Adjustments

Correction of an error in previously issued financial
statements.

Result from:

14-27
►
mathematical mistakes.
►
mistakes in application of accounting principles.
►
oversight or misuse of facts.
Adjustment made to the beginning balance of retained
earnings.
LO 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, 2014
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, 2014, you discover a
$50,000 error (net of tax) that caused the 2013 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2013. Would this discovery have any impact on the reporting of the Statement of
Retained Earnings for 2014?
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LO 2 Identify the items reported in a retained earnings statement.
Retained Earnings Statement
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2014
Balance, January 1, as previously reported
Prior period adjustment - error correction
Balance, January 1, as restated
Net income
Dividends
Balance, December 31
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$
$
1,050,000
(50,000)
1,000,000
360,000
(300,000)
1,060,000
LO 2 Identify the items reported in a retained earnings statement.
Retained Earnings Statement
Debits and Credits to Retained Earnings
Illustration 14-13
14-30
LO 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.
14-31
LO 2 Identify the items reported in a retained earnings statement.
Statement Presentation
Illustration 14-15
Illustration 14-15
14-32
LO 3
Statement Presentation and Analysis
Analysis
Return on
Common
Stockholders’
Equity
Net Income Available to
Common Stockholders
=
Average Common
Stockholders’ Equity
Ratio shows how many dollars of net income the company
earned for each dollar invested by the stockholders.
14-33
LO 3 Prepare and analyze a comprehensive stockholders’ equity section.
Statement Presentation and Analysis
Income
Statement
Presentation
Illustration 14-17
14-34
LO 4 Describe the form and content of corporation income statements.
Statement Presentation and Analysis
Income Statement Analysis
Earnings
Per Share
Net Income minus
Preferred Dividends
=
Weighted-Average Common
Shares Outstanding
Ratio indicates the net income
earned by each share of
outstanding common stock.
14-35
LO 5 Compute Earnings Per Share.
Statement Presentation and Analysis
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.
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LO 5 Compute Earnings Per Share.
A Look at IFRS
Key Points
14-37

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.
LO 6 Compare the accounting for dividends, retained earnings,
and income reporting under GAAP and IFRS.
A Look at IFRS
Key Points
14-38

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.
LO 6 Compare the accounting for dividends, retained earnings,
and income reporting under GAAP and IFRS.
A Look at IFRS
Key Points
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
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.
LO 6 Compare the accounting for dividends, retained earnings,
and income reporting under GAAP and IFRS.
A Look at IFRS
Looking to 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.
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.
14-40
LO 6 Compare the accounting for dividends, retained earnings,
and income reporting under GAAP and IFRS.
A Look at IFRS
IFRS Self-Test Questions
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.
14-41
LO 6 Compare the accounting for dividends, retained earnings,
and income reporting under GAAP and IFRS.
A Look at IFRS
IFRS Self-Test Questions
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.
14-42
LO 6 Compare the accounting for dividends, retained earnings,
and income reporting under GAAP and IFRS.
A Look at IFRS
IFRS Self-Test Questions
Under IFRS, a statement of comprehensive income must include:
a) accounts payable.
b) retained earnings.
c) income tax expense.
d) preference stock.
14-43
LO 6 Compare the accounting for dividends, retained earnings,
and income reporting under GAAP and IFRS.
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14-44