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Corporations:Corporations:Retained Earnings and the Retained Earnings and the
Income StatementIncome Statement
Corporations:Corporations:Retained Earnings and the Retained Earnings and the
Income StatementIncome StatementChapter 12
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Retained EarningsRetained EarningsRetained EarningsRetained Earnings
• All net income minus net losses minus dividends
• Negative balance in Retained Earnings - deficit
• Not a fund of cash
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Objective 1Objective 1Objective 1Objective 1
Account for stock dividends
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Stock Dividend Stock Dividend Stock Dividend Stock Dividend
• Proportional distribution of corporation’s own stock to shareholders
• Does not change total stockholders’ equity
• Transfer of retained earnings to contributed capital – no assets are distributed
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Entries for Stock DividendEntries for Stock DividendEntries for Stock DividendEntries for Stock Dividend
Small • Distribution is < 20-
25% of previously outstanding shares
• Debit retained earnings for market value of shares to be distributed
Large • Distribution is > 25% of
previously outstanding shares
• Debit retained earnings for par or stated value of shares
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How many shares of stock are distributed?
50,000 × 10% = 5,000 shares
How much will be debited to retained earnings?
5,000 shares x $14 = $70,000
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USE MARKET VALUE5,000 shares x $14
USE PARCommon stock = 5,000 shares x $1
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Apr 30 Retained Earnings 70,000Common Stock 5,000Paid in Capital in Excess ofPar, Common 65,000
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E12-13E12-13E12-13E12-13
Stockholders’ Equity:
Paid in Capital:
Common stock, $1 par, 100,000 shares authorized, 55,000 shares issued $55,000
Paid in capital in excess of par 265,000Total paid in capital $320,000Retained earnings ($120,000-70,000) 50,000Total stockholders’ equity $370,000
The number of shares issued increased.Retained earnings decreased
Total stockholders’ equity is the same
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Stock SplitsStock SplitsStock SplitsStock Splits
• Increases the number of shares authorized, issued and outstanding
• Decreased par value per share
• Balances in the accounts are unchanged
• Record in a memorandum entry
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GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Jun 30 Called in the outstanding $1 par common stock and distributed 2 shares of $0.50 par common stock for each old. There are now 100,000 sharesoutstanding.
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E12-3E12-3E12-3E12-3
Stockholders’ Equity:Paid in Capital:
Common stock, $0.50 par, 400,000 shares authorized, 100,000 shares issued $50,000
Paid in capital in excess of par 100,000Total paid in capital $150,000Retained earnings 200,000Total stockholders’ equity $350,000
Par value is cut in half
None of the amounts in the accounts have changed
Shares authorized and issued are double
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Objective 2Objective 2Objective 2Objective 2
Distinguish stock splits from stock dividends
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Comparison: StockComparison: StockDividends & Stock SplitsDividends & Stock Splits
Comparison: StockComparison: StockDividends & Stock SplitsDividends & Stock Splits
Stock Dividend:• Shifts amounts from
retained earnings to paid-in capital
• Par value per share remains unchanged
• Number of shares issued increases
• Total stockholders’ equity does not change
Stock Split:• Account balances do not
change
• Par value decreases
• Number of shares of stock authorized, issued, and outstanding increase
• Total stockholders’ equity does not change
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Objective 3Objective 3Objective 3Objective 3
Account for treasury stock
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Treasury StockTreasury StockTreasury StockTreasury Stock
• Shares that a company has issued and later reacquired
• Purchasing treasury stock decreases assets and stockholders’ equity
• Contra equity account
• Record at cost
• Report after retained earnings on balance sheet
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E12-17E12-17E12-17E12-17GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Feb 4 Cash 200,000Common Stock 20,000Paid in Capital in Excess ofPar, Common 180,000
Apr 22 Treasury Stock 14,000Cash 14,000
Contra Equity Account
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E12-17E12-17E12-17E12-17GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Aug 22 Cash 12,000Treasury Stock 8,400Paid in Capital from Treasury Stock Transactions 3,600
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Common Stock
Paid in CapitalIn Excess of Par,
Common
Paid in Capitalfrom Treasury
Stock Transactions
Retained Earnings Treasury Stock
20,000 180,000
14,000100,000*
*Assumed
8,400
3,600
5,600
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*Assumed
Austin Driving School, Inc.Partial Balance SheetDecember 31, 2008
Stockholders’ EquityPaid in Capital:
Common Stock $20,000Paid in Capital in Excess of Par, Common 180,000Paid in Capital from Treasury Stock Transactions 3,600 Total Paid in Capital $203,600
Retained Earnings 100,000 Subtotal $303,600Less Treasury Stock (400 shares at cost) 5,600Total Stockholders’ Equity $298,000
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Shares Issued & OutstandingShares Issued & OutstandingShares Issued & OutstandingShares Issued & Outstanding
• Issued shares – number of shares sold
• Outstanding shares – number of shares in the hands of stockholders
• Treasury stock decreases the number of shares outstanding
• Treasury stock does not receive dividends
In the previous example, then, the number of shares issued are 20,000. The number of shares outstanding are 19,600 (20,000 – 400 shares in treasury)
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Retirement of StockRetirement of StockRetirement of StockRetirement of Stock
• Decreases outstanding stock
• Retired shares cannot be reissued
• Remove stock from books– Debit stock accounts– Credit cash
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Objective 4Objective 4Objective 4Objective 4
Report restrictions on retained earnings
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Restrictions on Retained Restrictions on Retained EarningsEarnings
Restrictions on Retained Restrictions on Retained EarningsEarnings
• Reported in notes to financial statements
• Restricts amount of retained earnings available for dividends
• Appropriations are restrictions on retained earnings recorded by formal journal entries
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E12-19 aE12-19 aE12-19 aE12-19 a
Stockholders’ equity:
Common stock, no par $50,000
Retained earnings—Note X 250,000
Total stockholders’ equity $300,000
Note X— Long-term debt (or Restriction of retained earnings). The company’s long-term debt agreement restricts retained earnings in the amount of $200,000.
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E12-19 b E12-19 b E12-19 b E12-19 b
Stockholders’ equity:
Total paid-in capital $50,000
Retained earnings:
Appropriated for debt agreement $100,000
Unappropriated 150,000
Total retained earnings 250,000
Total stockholders’ equity $300,000
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Objective 5Objective 5Objective 5Objective 5
Analyze a corporate income statement
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Corporate Income StatementCorporate Income StatementCorporate Income StatementCorporate Income Statement
Continuing Operations Normal operating revenues and expenses, including income tax expense
Special Items
Items that are material in amount, but are not typical of regular operations
Earnings Per Share
Amount of net income for each share of outstanding common stock
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Income from Continuing Income from Continuing OperationsOperations
Income from Continuing Income from Continuing OperationsOperations
• Measures profitability of the ongoing operations
• Useful for making projections about future earnings
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Special ItemsSpecial ItemsSpecial ItemsSpecial Items
• Reported after income from continuing operations– Discontinued operations– Extraordinary gains and losses
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Discontinued OperationsDiscontinued OperationsDiscontinued OperationsDiscontinued Operations
• Segment of a business that has been sold
• Two parts– Income or loss from operations of business
from beginning of year to date of disposal– Gain or loss on disposal of the assets of the
segment– Reported net of the income tax effect
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Extraordinary ItemsExtraordinary ItemsExtraordinary ItemsExtraordinary Items
• Both unusual and infrequent– Unusual in nature – abnormal and only
incidentally related to customary activities– Infrequent in occurrence – not reasonably
expected to happen in the foreseeable future
• Reported net of income tax effect
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Conner Photographic Supplies, Inc.Income Statement
Year Ended December 31, 2008Sales revenue $430,000Cost of goods sold (240,000) Gross profit $190,000Operating expenses (120,000)Income from continuing operations $70,000Loss on discontinued operations $(50,000) Income tax savings 20,000 (30,000)Income before extraordinary items $40,000Extraordinary loss $(15,000) Income tax savings 6,000 (9,000)Net income $31,000
E12-20E12-20E12-20E12-20
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Earnings Per ShareEarnings Per ShareEarnings Per ShareEarnings Per Share
Net income - Preferred dividends Average number of common shares outstanding
Report separate EPS figures for each line on income statement starting with income from continuing operations though to net income
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Earnings Per ShareEarnings Per Shareand Preferred Stockand Preferred StockEarnings Per ShareEarnings Per Shareand Preferred Stockand Preferred Stock
Corporations with complex capital structures present two sets of EPS amounts
• Basic EPS
• Diluted EPS
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$108,000 – (1,000 x 6% x $50)
(52,000 shares – 2,000 shares)
= $105,000 / 50,000 shares
= $2.10
Net income - Preferred dividends Average number of common shares outstanding
Remember: Treasury stock is not considered outstanding
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Earnings per share:Income from continuing operations[($110,000 – $5,000) / 50,000] $2.10Loss on discontinued operations ($8,000 / 50,000) (.16)Income before extraordinary items[($102,000 – $5,000) / 50,000] $1.94Extraordinary gain ($20,000 / 50,000) .40Net income [($122,000 – $5,000) / 50,000] $2.34
E12-22E12-22E12-22E12-22Preferred dividends:10,000 $10 .05 = $5,000
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Statement of Retained EarningsStatement of Retained Earnings
• Reports how retained earnings changed over the accounting period
• Beginning balance + net income – dividends = Ending balance
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Comprehensive IncomeComprehensive IncomeComprehensive IncomeComprehensive Income
• Change in total stockholders’ equity from all sources other than from its owners– Net income – Unrealized gains/losses on certain
investments– Foreign currency translation adjustments
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Prior Period AdjustmentsPrior Period AdjustmentsPrior Period AdjustmentsPrior Period Adjustments
• Corrections to beginning balance of Retained Earnings for errors of an earlier period
• Correcting entry includes– Debit or credit to Retained Earnings for error amount– Debit or credit to asset or liability account that was
misstated
• Reported on Statement of Retained Earnings
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E12-24E12-24E12-24E12-24Sarah Lou Bakery, Inc.
Statement of Retained EarningsYear Ended December 31, 2003
MillionsRetained earnings, December 31, 2002,
as originally reported $39,000Prior period adjustment (5,000)Retained earnings, December 31, 2002,
as adjusted 34,000Net income for 2003 70,000 Subtotal 104,000Dividends for 2003 (24,000)Retained earnings, December 31, 2003 $80,000
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End of Chapter 12End of Chapter 12End of Chapter 12End of Chapter 12
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