CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING CHAPTER 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING Accounting Principles, Eighth Edition By Louis Hwang and John Burneson

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

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

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

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

No effect on StHolders Equ Dividends 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) No effect on cash flows Retained earnings 50,000 Dividends payable 50,000 March 25 (Date of Record) No entry April 6 (Payment Date) Dividends payable 50,000 No effect on StHolders Equ Cash 50,000 LO 1 Prepare the entries for cash dividends and stock dividends.

Cash Dividends - Preferred Stock Cash dividends must be paid first to preferred stockholders before any common 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.

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

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

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

Dividends Exercise 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. * * 2,000 shares x $50 par x 8% = $8,000 LO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Exercise 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. ** * * 2,000 shares x $50 par x 9% = $9,000 ** 2008 Pfd. dividends $9,000 – declared $8,000 = $1,000 LO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Exercise (b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 9% and cumulative. ** * * 2,000 shares x $50 par x 9% = $9,000 ** 2008 Pfd. dividends $9,000 – declared $8,000 = $1,000 LO 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. LO 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. LO 1 Prepare the entries for cash dividends and stock dividends.

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