Wey AP 8e Ch14

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Chapter14-1

CHAPTER 14

Additional Issues

in Accounting forCorporations

Accounting Principles, Eighth Edition

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Chapter14-2

1. Prepare the entries for cash dividends and stockdividends.

2. Identify the items reported in a retained earningsstatement.

3. Prepare and analyze a comprehensivestockholders equity section.

4. Describe the form and content of corporation

income statements.5. Compute earnings per share.

Study Objectives

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Chapter14-3

Corporations: Dividends, RetainedEarnings, and Income Reporting

DividendsRetained

Earnings

Statement

Presentation and

Analysis

Cash dividends

Stock dividends

Stock splits

Retained earnings

restrictions

Prior period

adjustments

Retained earnings

statement

Stockholders

Equity

Presentation

Stockholders

Equity Analysis

Income Statement

Presentation

Income Statement

Analysis

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Chapter14-4

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

Types of Dividends:

Dividends

LO 1 Prepare the entries for cash dividends and stock dividends.

1. Cash dividends.

2. Property dividends.

Dividends expressed: (1) as a percentage of the par orstated value, or (2) as a dollar amount per share.

3. Script (promissory note).

4. Stock dividends.

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Chapter14-5

Dividends require information concerning three dates:

Dividends


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Chapter14-6

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 dividendsby the Board of

Directors.

Dividends


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Chapter14-7

Illustration: What would be the journal entriesmade by a corporation that declared a $50,000 cashdividend on March 10, payable on April 6 toshareholders of record on March 25?

March 10 (Declaration Date)

Cash Dividien 50,000Dividends payable 50,000

March 25 (Date of Record) No entry

April 6 (Payment Date)

Dividends


Dividends payable 50,000Cash 50,000

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Chapter14-8

Allocating Cash Dividends BetweenPreferred and Ordinary Shares

Dividends


Holders of cumulativePreference Share mustbe paid any unpaid prior-year dividends beforeOrdinary Sharesholders receive dividends.

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Chapter14-9

Exercise Arnez Corporation was organized on January1, 2007. During its first year, the corporation issued

2,000 shares of $50 par value preferrence shares and

100,000 shares of $10 par value ordinary shares. 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 toeach class of stock, assuming the Preference Share

dividend is 8% and not cumulative.

Dividends


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Chapter14-10

Exercise (a) Show the allocation of dividends to eachclass of stock, assuming the Preference Share dividend

is 8% and not cumulative.

Dividends


2007 2008 2009Dividends declared 6,000$ 12,000$ 28,000$

Allocation to preferred 6,000 8,000 8,000

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

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

*

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Chapter14-11

Exercise (b) Show the allocation of dividends to eachclass of stock, assuming the Preference Share dividend

is 9% and cumulative.

Dividends


2007 2008 2009Dividends declared 6,000$ 12,000$ 28,000$

Dividends in arrears 3,000


Remainder to common -$ -$ 19,000$

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

*

**2007 Pfd. dividends $9,000 declared $6,000 = $3,000

**

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Chapter14-12

Exercise (c) Journalize the declaration of the cashdividend at December 31, 2009, under part (b).

Dividends


Cash Dividen 28,000

Dividends payable 28,000

2007 2008 2009

Dividends declared 6,000$ 12,000$ 28,000$Dividends in arrears 3,000


Remainder to common -$ -$ 19,000$

Journal entry:

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Chapter14-13

Stock DividendsPro rata distribution of the corporations own stock.

Dividends


Results in decrease in retained earnings and increase in Share Premium

Illustration 14-3

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Chapter14-14

Stock DividendsReasons why corporations issue stock dividends:

1. To satisfy stockholders dividend expectations

without spending cash.2. To increase the marketability of the corporations

stock.

3. To emphasize that a portion of stockholders equityhas been permanently reinvested in the business.

Dividends


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Chapter14-15

Size of Stock Dividends

Small stock dividend(less than 2025% of thecorporations issued stock, recorded at fair

market value)

Large stock dividend(greater than 2025% ofissued stock, recorded at par value)

Dividends


*This accounting is based on the assumption that a smallstock dividend will have little effect on the market price ofthe outstanding shares.

*

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Chapter14-16

10% stock dividend is declared

Share Dividen (5,000 x 10% x $40) 20,000Ordinary Shares dividends Distributable 500Share Premium -Ordinary 19,500

Stock issuedOrdinary Shares div. distributable 500

Share Capital -Ordinary (5,000 x 10% x$1)

500

Illustration: HH Inc. has 5,000 shares issued andoutstanding. The per share par value is $1, book value$32 and market value is $40.

Dividends


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Chapter14-17

Stockholders' equityPaid-in capital

Common stock, $1 par, 5,000 issued

and outstanding 5,000$Common stock dividends distributable 500

Paid-in capital in excess of par 64,500

Retained earnings 90,000Total stockholders' equity 160,000$

HH Inc.

Balance Sheet (partial)

Stockholders Equity with Dividends Distributable

Dividends


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Chapter14-18

HH Inc. Before After Net

Dividend Dividend Change

Stockholders' equity

Paid-in capitalCommon stock, $1 par, 5,000 issuedand outstanding 5,000$ 5,500$ 500$

Paid-in capital in excess of par 45,000 64,500 19,500Retained earnings 110,000 90,000 (20,000)

Total stockholders' equity 160,000$ 160,000$

Outstanding shares 5,000 5,500Book value per share 32$ 29$

Dividends


Effects of Stock Dividends

$ 0

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Chapter14-19

Which of the following statements about small stockdividends is true?

a. A debit to Retained Earnings for the par value ofthe shares issued should be made.

b. A small stock dividend decreases totalstockholders equity.

c. Market value per share should be assigned to thedividend shares.

d. A small stock dividend ordinarily will have noeffect on book value per share of stock.

Question

Dividends


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Chapter14-20

In the stockholders equity section, Ordinary SharesDividends Distributable is reported as a(n):

a. deduction from total paid-in capital andretained earnings.

b. addition to additional paid-in capital.

c. deduction from retained earnings.

d. addition to capital stock.

Question

Dividends


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Chapter14-21

Stock Split

Reduces the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number ofshares.

Dividends


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Chapter14-22

2 for 1 Stock SplitNo Entry -- Disclosure that par is now $.50 andshares outstanding are 10,000.

Illustration:HH Inc. has 5,000 shares issued andoutstanding. The per share par value is $1, bookvalue $32 and market value is $40.

Dividends


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Chapter14-23

HH Inc. Before After Net

Split Split Change

Stockholders' equity

Paid-in capitalCommon stock 5,000$ 5,000$ -$

Paid-in capital in excess of par 45,000 45,000 -

Retained earnings 110,000 110,000 -

Total stockholders' equity 160,000$ 160,000$ -$

Outstanding shares 5,000 10,000Book value per share 32$ 16$

Dividends


Effects of Stock Dividends

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Chapter14-24

Retained earningsis net income that a companyretains 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 isidentified as a deficit.

Retained Earnings

LO 2 Identify the items reported in a retained earnings statement.

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Chapter14-25

Restrictions can result from:

1. Legal restrictions.

2. Contractual restrictions.

3. Voluntary restrictions.

Retained Earnings Restrictions


Companies generally disclose retained earnings

restrictions in the notes to the financial statements.

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Chapter14-26

Corrections of ErrorsResult 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 retainedearnings

Prior Period Adjustments


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Chapter14-27

Woods, Inc.

Statement of Retained EarningsFor the Year Ended December 31, 2007

Balance, January 1 1,050,000$

Net income 360,000

Dividends (300,000)

Balance, December 31 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 inventoryto be overstated (overstated inventory caused COGS to be lower andthus net income to be higher in 2006). Would this discovery have anyimpact on the reporting of the Statement of Retained Earnings for2007?

Prior Period Adjustments


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Chapter14-28

Woods, Inc.

Statement of Retained EarningsFor the Year Ended December 31, 2007

Balance, January 1, as previously reported 1,050,000$

Prior period adjustment - error correction (50,000)

Balance, January 1, as restated 1,000,000

Net income 360,000

Dividends (300,000)

Balance, December 31 1,060,000$

Retained Earnings Statement


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Chapter

14-29



The company prepares the statement from theRetained Earnings account.

Illustration 14-13

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Chapter

14-30

All but one of the following is reported in a retainedearnings 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.

Question



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Chapter

14-31 LO 3 Prepare and analyze a comprehensive stockholders equity section.

Statement Analysis and PresentationIllustration 14-15

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Chapter

14-32

Stockholders Equity Analysis

Net Income Availableto Ordinary Sharesholders

Return onOrdinary

SharesholdersEquity

= Average CommonStockholders Equity

LO 3 Prepare and analyze a comprehensive stockholders equity section.

Statement Analysis and Presentation

This ratio shows how many dollars of net income thecompany earned for each dollar invested by thestockholders.

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Chapter

14-33

IncomeStatementPresentation

LO 4 Describe the form and content of corporation income statements.


Illustration 14-17

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Chapter

14-34

Income Statement Analysis

Net Income minusPreferred DividendsEarnings

Per Share = Weighted-Average CommonShares Outstanding

LO 5 Compute Earnings Per Share.


This ratio indicates the net income earned by eachshare of outstanding Ordinary Shares.

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Chapter

14-35

The income statement for Nadeen, Inc. shows incomebefore income taxes $700,000, income tax expense$210,000, and net income $490,000. If Nadeen has

100,000 shares of Ordinary Shares outstandingthroughout the year, earnings per share is:

a. $7.00.

b. $4.90.c. $2.10.

d. No correct answer is given.

Question

($490,000 / 100,000 = $4.90)

LO 5 Compute Earnings Per Share.


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Chapter

14 36

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Wey AP 8e Ch14

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