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

Dividends A dividend is a corporation’s 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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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

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