Chapter
14-1
CHAPTER 14
CORPORATIONS:
DIVIDENDS, RETAINED
EARNINGS, AND INCOME
REPORTING
Accounting Principles, Eighth Edition
Chapter
14-2
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
14-3
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
14-4
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
14-5
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Dividends require information concerning three dates:
Chapter
14-6
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.
Chapter
14-7
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
14-8
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 before
common stockholders receive dividends.
Chapter
14-9
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Exercise Arnez Corporation was organized on January
1, 2007. During its first year, the corporation issued
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: 2007, $6,000, 2008, $12,000, and 2009,
$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 (a) Show the allocation of dividends to each
class of stock, assuming the preferred stock dividend is
8% and not cumulative.
2007
Dividends declared
2008
2009
$
6,000
$ 12,000
$ 28,000
Allocation to preferred *
Remainder to common
$
6,000
8,000
8,000
4,000
$ 20,000
-
$
* 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 (b) Show the allocation of dividends to each
class of stock, assuming the preferred stock dividend is
9% and cumulative.
2007
Dividends declared
$
6,000
2008
2009
$ 12,000
$ 28,000
3,000 **
9,000
Dividends in arrears
Allocation to preferred *
Remainder to common
$
6,000
-
$
-
9,000
$ 19,000
* 2,000 shares x $50 par x 9% = $9,000
** 2007 Pfd. dividends $9,000 – declared $6,000 = $3,000
Chapter
14-12
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Exercise (c) Journalize the declaration of the cash
dividend at December 31, 2009, under part (b).
2007
Dividends declared
$
6,000
2008
2009
$ 12,000
$ 28,000
Dividends in arrears
3,000
Allocation to preferred
Remainder to common
Journal entry:
Retained earnings
Dividends payable
Chapter
14-13
6,000
$
-
9,000
$
-
9,000
$ 19,000
28,000
28,000
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
14-14
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
14-15
LO 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
14-16
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.
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
Common stock (5,000 x 10% x $1)
Chapter
14-17
500
500
LO 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
14-18
$
5,000
500
64,500
90,000
$ 160,000
LO 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
14-19
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
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 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
14-20
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. addition to additional paid-in capital.
c. deduction from retained earnings.
d. addition to capital stock.
Chapter
14-21
LO 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
14-22
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
14-23
LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Effects of Stock Dividends
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
LO 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
LO 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
LO 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 to the beginning balance of retained
earnings
Chapter
14-27
LO 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, 2007
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, 2007, you
discover a $50,000 error (net of tax) that caused the 2006 inventory
to be overstated (overstated inventory caused COGS to be lower and
thus net income to be higher in 2006). Would this discovery have any
impact on the reporting of the Statement of Retained Earnings for
2007?
Chapter
14-28
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, 2007
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
LO 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
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.
Chapter
14-31
LO 2 Identify the items reported in a retained earnings statement.
Statement Analysis and Presentation
Illustration 14-15
Chapter
14-32
LO 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
LO 3 Prepare and analyze a comprehensive stockholders’ equity section.
Statement Analysis and Presentation
Income
Statement
Presentation
Chapter
14-34
Illustration 14-17
LO 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
LO 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
LO 5 Compute Earnings Per Share.
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Chapter
14-37