CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING

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)

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:

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.

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

Dividends Exercise Arnez Corporation was organized on January 1, 2008. During its first year, the corporation issued 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, $6,000, 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 (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 (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 $6,000 = $3,000 LO 1 Prepare the entries for cash dividends and stock dividends.

Dividends Exercise (c) Journalize the declaration of the cash dividend at December 31, 2010, under part (b). Journal entry: Retained earnings 28,000 Dividends payable 28,000 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.

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

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

Dividends Effects of Stock Dividends $ 0 Look page 601

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

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