2. Accounting Principles, Ninth Edition
Chapter 14
Corporations:
Dividends, Retained
Earnings, and Income
Reporting
Accounting Principles, Ninth Edition

3. Study Objectives
Prepare the entries for cash dividends and stock dividends.
Identify the items reported in a retained earnings statement.
Prepare and analyze a comprehensive stockholders’ equity section.
Describe the form and content of corporation income statements.
Compute earnings per share.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

4. Corporations: Dividends, Retained Earnings, and Income Reporting
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
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

5. Dividends
A distribution of cash or stock to stockholders on a pro rata (proportional) basis.
Types of Dividends:
Cash dividends.
Property dividends.
Stock dividends.
Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share.
SO 1 Prepare the entries for cash dividends and stock dividends.

6. Dividends Dividends require information concerning three dates:
SO 1 Prepare the entries for cash dividends and stock dividends.

7. Dividends Cash Dividends
For a corporation to pay a cash dividend, it must have:
Retained earnings - Payment of cash dividends from retained earnings is legal in all states.
Adequate cash.
A declaration of dividends by the Board of Directors.
SO 1 Prepare the entries for cash dividends and stock dividends.

8. 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)
Retained earnings 50,000
Dividends payable 50,000
December 22 (Date of Record)
No entry
January 20 (Payment Date)
Dividends payable 50,000
Cash 50,000
SO 1 Prepare the entries for cash dividends and stock dividends.

9. 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.
SO 1 Prepare the entries for cash dividends and stock dividends.

10. Dividends
Illustration: On December 31, 2010, 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, 2010, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend.
Retained earnings 6,000
Dividends payable 6,000
Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000
SO 1 Prepare the entries for cash dividends and stock dividends.

11. Dividends
Illustration: At December 31, 2011, IBR declares a $50,000 cash dividend. Show the allocation of dividends to each class of stock.
$ 50,000
2,000 **
8,000 *
$ 40,000
* 1,000 shares x $100 par x 8% = $8,000
** 2010 Pfd. dividends $8,000 – declared $6,000 = $2,000
SO 1 Prepare the entries for cash dividends and stock dividends.

12. Dividends
Illustration: At December 31, 2011, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend.
Retained earnings 50,000
Dividends payable 50,000
SO 1 Prepare the entries for cash dividends and stock dividends.

14. Dividends Stock Dividends
Pro rata distribution of the corporation’s own stock.
Illustration 14-3
Results in decrease in retained earnings and increase in paid-in capital.
SO 1 Prepare the entries for cash dividends and stock dividends.

15. Dividends Stock Dividends
Reasons why corporations issue stock dividends:
To satisfy stockholders’ dividend expectations without spending cash.
To increase the marketability of the corporation’s stock.
To emphasize that a portion of stockholders’ equity has been permanently reinvested in the business.
SO 1 Prepare the entries for cash dividends and stock dividends.

16. 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.
SO 1 Prepare the entries for cash dividends and stock dividends.

17. 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
500
Common stock (5,000 x 10% x $1)
500
SO 1 Prepare the entries for cash dividends and stock dividends.

18. Dividends Stockholders’ Equity with Dividends Distributable
SO 1 Prepare the entries for cash dividends and stock dividends.

19. Dividends Effects of Stock Dividends $ 0$
SO 1 Prepare the entries for cash dividends and stock dividends.

20. Dividends
Question
Which of the following statements about small stock dividends is true?
A debit to Retained Earnings for the par value of the shares issued should be made.
A small stock dividend decreases total stockholders’ equity.
Market value per share should be assigned to the dividend shares.
A small stock dividend ordinarily will have no effect on book value per share of stock.
SO 1 Prepare the entries for cash dividends and stock dividends.

21. Dividends
Question
In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n):
deduction from total paid-in capital and retained earnings.
current liability.
deduction from retained earnings.
addition to capital stock.
SO 1 Prepare the entries for cash dividends and stock dividends.

22. Dividends Stock Split Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of shares.
SO 1 Prepare the entries for cash dividends and stock dividends.

23. 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.
SO 1 Prepare the entries for cash dividends and stock dividends.

25. Dividends Effects of Stock Splits
SO 1 Prepare the entries for cash dividends and stock dividends.

26. 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.
SO 2 Identify the items reported in a retained earnings statement.

27. Retained Earnings Restrictions
Restrictions can result from:
Legal restrictions.
Contractual restrictions.
Voluntary restrictions.
Companies generally disclose retained earnings restrictions in the notes to the financial statements.
SO 2 Identify the items reported in a retained earnings statement.

28. 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 made to the beginning balance of retained earnings
SO 2 Identify the items reported in a retained earnings statement.

29. Prior Period Adjustments
Before issuing the report for the year ended December 31, 2010, you discover a $50,000 error (net of tax) that caused the 2009 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2010?
SO 2 Identify the items reported in a retained earnings statement.

30. Retained Earnings Statement
SO 2 Identify the items reported in a retained earnings statement.

31. Retained Earnings Statement
The company prepares the statement from the Retained Earnings account.
Illustration 14-13
SO 2 Identify the items reported in a retained earnings statement.

32. Retained Earnings Statement
Question
All but one of the following is reported in a retained earnings statement. The exception is:
cash and stock dividends.
net income and net loss.
some disposals of treasury stock below cost.
sales of treasury stock above cost.
SO 2 Identify the items reported in a retained earnings statement.

33. Statement Analysis and Presentation
Illustration 14-15
SO 3 Prepare and analyze a comprehensive stockholders’ equity section.

34. Return on Common Stockholders’ Equity
Statement Analysis and Presentation
Stockholders’ Equity Analysis
Net Income Available to Common Stockholders
Return on Common Stockholders’ Equity =
Average Common Stockholders’ Equity
This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders.
SO 3 Prepare and analyze a comprehensive stockholders’ equity section.

35. Income Statement Presentation
Statement Analysis and Presentation
Income Statement Presentation
Illustration 14-17
SO 4 Describe the form and content of corporation income statements.

36. Income Statement Analysis
Statement Analysis and Presentation
Income Statement Analysis
Net Income minus Preferred Dividends
Earnings Per Share =
Weighted-Average Common Shares Outstanding
This ratio indicates the net income earned by each share of outstanding common stock.
SO 5 Compute Earnings Per Share.

37. Question Statement Analysis and Presentation
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:
$7.00.
$4.90.
$2.10.
No correct answer is given.
($490,000 / 100,000 = $4.90)
SO 5 Compute Earnings Per Share.

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