1. 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

2. 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

3. 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.

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

6. 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.

7. 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.

8. 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.

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

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.