1. Chapter 14-1 Chapter 14 Accounting Principles, Ninth Edition Corporations: Dividends, Retained Earnings, and Income Reporting

2. Chapter 14-2 DividendsDividends 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 Retained Earnings Statement Presentation and Analysis Corporations: Dividends, Retained Earnings, and Income Reporting

3. Chapter 14-3 A distribution of cash or stock to stockholders on a pro rata (proportional) basis. Types of Dividends: DividendsDividends SO 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 or stated value, or (2) as a dollar amount per share. 3. Stock dividends.

4. Chapter 14-4 Dividends require information concerning three dates: DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends.

5. Chapter 14-5 Cash Dividends For a corporation to pay a cash dividend, it must have: 1. 1.Retained earnings - Payment of cash dividends from retained earnings is legal in all states. 2. 2.Adequate cash. 3. 3.A declaration of dividends by the Board of Directors. DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends.

6. Chapter 14-6 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) January 20 (Payment Date) DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends. Dividends payable 50,000 Cash 50,000 No entry

7. Chapter 14-7 Allocating Cash Dividends Between Preferred and Common Stock DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends. Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends.

8. Chapter 14-8 DividendsDividends SO 1 Prepare the entries for cash dividends and stock 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

9. Chapter 14-9 DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends. Retained earnings 50,000 Dividends payable 50,000 Illustration: At December 31, 2011, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend.

10. Chapter 14-10 Stock Dividends Pro rata distribution of the corporation’s own stock. DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends. Results in decrease in retained earnings and increase in paid-in capital. Illustration 14-3

11. Chapter 14-11 Stock Dividends Reasons why corporations issue stock dividends: 1. 1.To satisfy stockholders’ dividend expectations without spending cash. 2. 2.To increase the marketability of the corporation’s stock. 3. 3.To emphasize that a portion of stockholders’ equity has been permanently reinvested in the business. DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends.

12. Chapter 14-12 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) DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends. * This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares. *

13. Chapter 14-13 10% stock dividend is declared Retained earnings (5,000 x 10% x $40) 20,000 Common stock dividends distributable500 Additional paid-in capital 19,500 Stock issued Common stock div. distributable500 Common stock (5,000 x 10% x $1) 500 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. DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends.

14. Chapter 14-14 Stockholders’ Equity with Dividends Distributable DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends.

15. Chapter 14-15 DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends. Effects of Stock Dividends $ 0

16. Chapter 14-16 Which of the following statements about small stock dividends is true? a.A debit to Retained Earnings for the par value of the shares issued should be made. b.A small stock dividend decreases total stockholders’ equity. c.Market value per share should be assigned to the dividend shares. d.A small stock dividend ordinarily will have no effect on book value per share of stock. Question DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends.

17. Chapter 14-17 In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n): a.deduction from total paid-in capital and retained earnings. b.current liability. c.deduction from retained earnings. d.addition to capital stock. Question DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends.

18. Chapter 14-18 Stock Split Reduces the market value of shares. No entry recorded for a stock split. Decrease par value and increase number of shares. DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends.

19. Chapter 14-19 2 for 1 Stock Split No Entry -- Disclosure that par is now $.50 and shares outstanding are 10,000. 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. DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends.

20. Chapter 14-20

21. Chapter 14-21 DividendsDividends SO 1 Prepare the entries for cash dividends and stock dividends. Effects of Stock Splits

22. Chapter 14-22 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. Retained Earnings SO 2 Identify the items reported in a retained earnings statement.

23. Chapter 14-23 Restrictions can result from: 1. 1.Legal restrictions. 2. 2.Contractual restrictions. 3. 3.Voluntary restrictions. Retained Earnings Restrictions SO 2 Identify the items reported in a retained earnings statement. Companies generally disclose retained earnings restrictions in the notes to the financial statements.

24. Chapter 14-24 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 Prior Period Adjustments SO 2 Identify the items reported in a retained earnings statement.

25. Chapter 14-25 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 2009. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2010? Prior Period Adjustments SO 2 Identify the items reported in a retained earnings statement.

26. Chapter 14-26 Retained Earnings Statement SO 2 Identify the items reported in a retained earnings statement.

27. Chapter 14-27 Retained Earnings Statement SO 2 Identify the items reported in a retained earnings statement. The company prepares the statement from the Retained Earnings account. Illustration 14-13

28. Chapter 14-28 All but one of the following is reported in a retained earnings 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 Retained Earnings Statement SO 2 Identify the items reported in a retained earnings statement.

29. Chapter 14-29 SO 3 Prepare and analyze a comprehensive stockholders’ equity section. Statement Analysis and Presentation Illustration 14-15

30. Chapter 14-30 Stockholders’ Equity Analysis Net Income Available to Common Stockholders Return on Common Stockholders’ Equity = Average Common Stockholders’ Equity SO 3 Prepare and analyze a comprehensive stockholders’ equity section. Statement Analysis and Presentation This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders.

31. Chapter 14-31 Income Statement Presentation SO 4 Describe the form and content of corporation income statements. Statement Analysis and Presentation Illustration 14-17

32. Chapter 14-32 Income Statement Analysis Net Income minus Preferred Dividends Earnings Per Share = Weighted-Average Common Shares Outstanding SO 5 Compute Earnings Per Share. Statement Analysis and Presentation This ratio indicates the net income earned by each share of outstanding common stock.

33. Chapter 14-33 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: a.$7.00. b.$4.90. c.$2.10. d.No correct answer is given. Question ($490,000 / 100,000 = $4.90) SO 5 Compute Earnings Per Share. Statement Analysis and Presentation

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