Chapter 14-1 CHAPTER 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING Accounting...

Chapter 14-1

CHAPTER CHAPTER 1414CHAPTER CHAPTER 1414

CORPORATIONS: DIVIDENDS, RETAINED

EARNINGS, AND INCOME REPORTING

CORPORATIONS: DIVIDENDS, RETAINED

EARNINGS, AND INCOME REPORTING

Accounting Principles, Eighth Edition

By Louis Hwang and John Burneson

Chapter 14-2

Corporations: Dividends, Retained Corporations: Dividends, Retained Earnings, and Income ReportingEarnings, and Income Reporting

Corporations: Dividends, Retained Corporations: Dividends, Retained Earnings, and Income ReportingEarnings, and Income Reporting

DividendsDividendsDividendsDividends Retained Retained

EarningsEarningsRetained Retained

EarningsEarnings

Statement Statement

Presentation and Presentation and

AnalysisAnalysis

Statement Statement

Presentation and Presentation and

AnalysisAnalysis

Cash dividendsCash dividends

Stock dividendsStock dividends

Stock splitsStock splits

Retained earnings Retained earnings restrictionsrestrictions

Prior period Prior period adjustmentsadjustments

Retained earnings Retained earnings statementstatement

Stockholders’ Stockholders’ Equity Equity PresentationPresentation

Stockholders’ Stockholders’ Equity AnalysisEquity Analysis

Income Statement Income Statement PresentationPresentation

Income Statement Income Statement AnalysisAnalysis

Chapter 14-3

A distribution of cash or stock to stockholders on a pro rata (proportional) basis.

Types of Dividends:

DividendsDividendsDividendsDividends

LO 1 Prepare the entries for cash dividends and stock LO 1 Prepare the entries for cash dividends and stock dividends.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. Script (promissory note).

4. Stock dividends.

Chapter 14-4

Dividends require information concerning three dates:



Chapter 14-5

http://www.5min.com/Video/Why-You-Should-Buy-Blue-Chip-Dividend-Stocks-355201903

Chapter 14-6

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

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 50,000Dividends payable 50,000

March 25 (Date of Record) No entry

April 6 (Payment Date)



Dividends payable 50,000Cash 50,000

No effect on cash flows

No effect on StHolders Equ

Chapter 14-8

Cash Dividends - Preferred StockCash Dividends - Preferred Stock

Cash dividends must be paid first to Cash dividends must be paid first to preferredpreferred stockholders stockholders beforebefore any any

commoncommon stockholders are paid. 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.

Non-Cumul preferred stock Only the current year’s

dividend must be paid to preferred stockholders before the common stockholders.

Chapter 14-9

DividendsDividends

If you are a company, which stock do you want to offer?

If you are a shareholder, which do you want to own?

Chapter 14-10

ExerciseExercise 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 14-11

ExerciseExercise 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.



* 2,000 shares x $50 par x 8% = $8,000

2008 2009 2010

Dividends declared

Allocation to pref erred

Remainder to common -$ -$ -$ *

Chapter 14-12

ExerciseExercise 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 8,000$ 12,000$ 28,000$

Allocation to pref erred 8,000 8,000 8,000

Remainder to common -$ 4,000$ 20,000$

* 2,000 shares x $50 par x 8% = $8,000

*

Chapter 14-13

ExerciseExercise 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 pref erred

Remainder to common -$ -$ -$

* 2,000 shares x $50 par x 9% = $9,000

*

** 2008 Pfd. dividends $9,000 – declared $8,000 = $1,000

**

Chapter 14-14

ExerciseExercise (b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 9% and cumulative.



2008 2009 2010

Dividends declared 8,000$ 12,000$ 28,000$

Dividends in arrears 1,000

Allocation to pref erred 9,000 9,000 9,000

Remainder to common -$ 2,000$ 19,000$

* 2,000 shares x $50 par x 9% = $9,000

*

** 2008 Pfd. dividends $9,000 – declared $8,000 = $1,000

**

Chapter 14-15

Stock Dividends

Pro rata distribution of the corporation’s own stock.



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

Illustration 14-3

Chapter 14-16

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 14-17

Stock SplitStock 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.

No journal entry – Why? NO change in equity accounts


Chapter 14-18

2 for 1 Stock Split

No Entry -- Disclosure that par is now $.50 No Entry -- Disclosure that par is now $.50 and shares outstanding are 10,000.and shares outstanding are 10,000.

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.



Chapter 14-1 CHAPTER 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING Accounting...

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