ch14, Accounting Principles

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
14-1
14
Corporations: Dividends,
Retained Earnings, and
Income Reporting
Learning Objectives
After studying this chapter, you should be able to:
[1] Prepare the entries for cash dividends and stock dividends.
[2] Identify the items reported in a retained earnings statement.
[3] Prepare and analyze a comprehensive stockholders equity section.
[4] Describe the form and content of corporation income statements.
[5] Compute earnings per share.
14-2
Preview of Chapter 14
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
14-3
Dividends
Distribution of cash or stock to stockholders on a pro rata

(proportional) basis.
Types of Dividends:
1. Cash dividends. 3. Stock dividends.

2. Property dividends. 4. Scrip (promissory note).
Dividends expressed: (1) as a percentage of the par or stated

value, or (2) as a dollar amount per share.
14-4 LO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Cash Dividends
For a corporation to pay a cash dividend, it must have:
1. Retained earnings - Payment of cash dividends from
retained earnings is legal in all states.
2. Adequate cash.
3. A declaration of dividends by the Board of Directors.
Dividends
Three dates: Illustration 14-1

Key dividend dates
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)

Cash Dividends 50,000
Dividends Payable 50,000
December 22 (Date of Record) No entry
January 20 (Payment Date)

Cash 50,000
Dividends
Allocating Cash Dividends Between Preferred

and Common Stock
Holders of cumulative preferred stock must be paid any unpaid

prior-year dividends and their current years dividend before
common stockholders receive dividends.
Dividends
Illustration: On December 31, 2014, 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, 2014, the directors declare a $6,000 cash dividend.
Prepare the entry to record the declaration of the dividend.

Preferred Dividends: 1,000 shares x $100 par x 8% = $8,000
Dividends
Illustration: At December 31, 2015, 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

** 2014 Pfd. dividends $8,000 declared $6,000 = $2,000
Dividends
Illustration: At December 31, 2015, IBR declares a $50,000 cash

dividend. Prepare the entry to record the declaration of the
dividend.
14-12
Dividends
Stock Dividends
Pro rata distribution of the corporations own stock.
Illustration 14-5
Results in decrease in retained earnings and increase in paid-in capital.
Dividends
Stock Dividends
Reasons why corporations issue stock dividends:
1. Satisfy stockholders dividend expectations without

spending cash.
2. Increase marketability of the corporations stock.
3. Emphasize a portion of stockholders equity has been

permanently reinvested in the business.
Dividends
Stock Dividends
Small stock dividend (less than 2025% of the
corporations issued stock, recorded at fair market value) *
Large stock dividend (greater than 2025% of issued

stock, recorded at par value)
* Accounting based on the assumption that a small stock dividend will

have little effect on the market price of the outstanding shares.
Dividends
Illustration: Medland Corporation declares a 10% stock dividend on

its 50,000 shares of $10 par value common stock. The current fair
market value of its stock is $15 per share. Record the entry on the
declaration date:
Stock Dividends (50,000 x 10% x $15) 75,000

Common Stock Dividends Distributable 50,000
Paid-in Capital in Excess of Par 25,000
Statement Presentation Illustration 14-3
Dividends
Illustration: Record the journal entry when Medland issues the

dividend shares.
Common Stock Dividends Distributable 50,000

Common Stock 50,000
Dividends
Effects of Stock Dividends

Illustration 14-4
Dividends
Question
Which of the following statements about small stock dividends
is true?
a. A debit to Stock Dividends 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.
Dividends
Question
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.
Dividends
Stock Splits
Issuance of additional shares to stockholders according to
their percentage ownership.
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of shares.
Helpful
Helpful Hint
Hint A A stock
stock split
split
changes
changes the
the par
par value
value per
per
share
share but
but does
does not
not affect
affect
any
any balances
balances inin
stockholders
stockholders equity.
equity.
Dividends
Stock Splits
Effect of stock split for stockholders
Illustration 14-5
Dividends
Effects for Medland Corporation, assuming that it splits its

50,000 shares of common stock on a 2-for-1 basis.
Illustration 14-6
14-24
Retained Earnings
Net income increases Retained Earnings and a net loss
decreases Retained Earnings.
Part of the stockholders claim on the total assets of the

corporation.
Debit balance in Retained Earnings is identified as a

deficit.
Illustration 14-9
14-25 LO 2 Identify the items reported in a retained earnings statement.

Retained Earnings
Retained Earnings Restrictions

Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Illustration 14-11
Disclosure of restriction

Retained Earnings
Prior Period Adjustments

Correction of an error in previously issued financial
statements.
Result from:
mathematical mistakes.
mistakes in application of accounting principles.
oversight or misuse of facts.
Adjustment made to the beginning balance of retained
earnings.

Retained Earnings Statement
Before issuing the report for the year ended December 31, 2014, you discover a
$50,000 error (net of tax) that caused the 2013 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2013. Would this discovery have any impact on the reporting of the Statement of
Retained Earnings for 2014?


Debits and Credits to Retained Earnings

Illustration 14-13

Question
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.

Statement Presentation
Illustration 14-15
Illustration 14-15
14-32 LO 3
Statement Presentation and Analysis
Analysis
Return on Net Income Available to

Common Common Stockholders
Stockholders =
Average Common
Equity
Stockholders Equity
Ratio shows how many dollars of net income the company

earned for each dollar invested by the stockholders.
14-33 LO 3 Prepare and analyze a comprehensive stockholders equity section.

Income
Statement
Presentation
Illustration 14-17
14-34 LO 4 Describe the form and content of corporation income statements.

Income Statement Analysis
Net Income minus

Earnings Preferred Dividends
Per Share =
Weighted-Average Common
Shares Outstanding
Ratio indicates the net income

earned by each share of
outstanding common stock.
14-35 LO 5 Compute Earnings Per Share.

Question
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. ($490,000 / 100,000 = $4.90)
c. $2.10.
d. No correct answer is given.
14-36 LO 5 Compute Earnings Per Share.

A Look at IFRS
Key Points
The term reserves is used in IFRS to indicate all noncontributed
(nonpaid-in capital). Reserves include retained earnings and other
comprehensive income items, such as revaluation surplus and
unrealized gains or losses on available-for sale securities.
IFRS often uses terms such as retained profits or accumulated
profit or loss to describe retained earnings. The term retained
earnings is also often used.
LO 6 Compare the accounting for dividends, retained earnings,

14-37 and income reporting under GAAP and IFRS.
A Look at IFRS
Key Points
The accounting related to prior period adjustment is essentially the
same under IFRS and GAAP. One area where IFRS and GAAP differ
in reporting relates to error corrections in previously issued financial
statements. While IFRS requires restatement with some exceptions,
GAAP does not permit any exceptions.
The stockholders equity section is essentially the same under IFRS
and GAAP. However, terminology used to describe certain
components is often different.
Equity is given various descriptions under IFRS, such as
shareholders equity, owners equity, capital and reserves, and
shareholders funds.

A Look at IFRS
Key Points
The income statement using IFRS is called the statement of
comprehensive income. A statement of comprehensive income is
presented in a one- or two-statement format. The single-statement
approach includes all items of income and expense, as well as each
component of other comprehensive income or loss by its individual
characteristic. In the two-statement approach, a traditional income
statement is prepared. It is then followed by a statement of
comprehensive income, which starts with net income or loss and
then adds other comprehensive income or loss items.
The computations related to earnings per share are essentially the
same under IFRS and GAAP.

A Look at IFRS
Looking to the Future

The IASB and the FASB are currently working on a project related to
financial statement presentation. An important part of this study is to
determine whether certain line items, subtotals, and totals should be
clearly defined and required to be displayed in the financial statements.
For example, it is likely that the statement of stockholders equity and its
presentation will be examined closely.
Both the IASB and FASB are working toward convergence of any
remaining differences related to earnings per share computations. This
convergence will deal with highly technical changes beyond the scope of
this textbook.

A Look at IFRS
IFRS Self-Test Questions

The basic accounting for cash dividends and stock dividends:
a) is different under IFRS versus GAAP.
b) is the same under IFRS and GAAP.
c) differs only for the accounting for cash dividends between

GAAP and IFRS.
d) differs only for the accounting for stock dividends between

GAAP and IFRS.

A Look at IFRS

Which item in not considered part of reserves?
a) Unrealized loss on available-for-sale investments.
b) Revaluation surplus.
c) Retained earnings.
d) Issued shares.

A Look at IFRS

Under IFRS, a statement of comprehensive income must include:
a) accounts payable.
b) retained earnings.
c) income tax expense.
d) preference stock.

Copyright
Copyright 2013 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
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express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
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programs or from the use of the information contained herein.
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[2] Identify the items reported in a retained earnings statement.

[3] Prepare and analyze a comprehensive stockholders equity section.

[4] Describe the form and content of corporation income statements.

[5] Compute earnings per share.

Distribution of cash or stock to stockholders on a pro rata

1. Cash dividends. 3. Stock dividends.

Dividends expressed: (1) as a percentage of the par or stated

3. A declaration of dividends by the Board of Directors.

Three dates: Illustration 14-1

Illustration: On Dec. 1, the directors of Media General declare a

December 1 (Declaration Date)

December 22 (Date of Record) No entry

January 20 (Payment Date)

Allocating Cash Dividends Between Preferred

Holders of cumulative preferred stock must be paid any unpaid

Illustration: On December 31, 2014, IBR Inc. has 1,000 shares

Cash Dividends 6,000

Preferred Dividends: 1,000 shares x $100 par x 8% = $8,000

Illustration: At December 31, 2015, IBR declares a $50,000

* 1,000 shares x $100 par x 8% = $8,000

Illustration: At December 31, 2015, IBR declares a $50,000 cash

Cash Dividends 50,000

Dividends Payable 50,000

Results in decrease in retained earnings and increase in paid-in capital.

1. Satisfy stockholders dividend expectations without

2. Increase marketability of the corporations stock.

3. Emphasize a portion of stockholders equity has been

Large stock dividend (greater than 2025% of issued

* Accounting based on the assumption that a small stock dividend will

Illustration: Medland Corporation declares a 10% stock dividend on

Stock Dividends (50,000 x 10% x $15) 75,000

Statement Presentation Illustration 14-3

Illustration: Record the journal entry when Medland issues the

Common Stock Dividends Distributable 50,000

Effects of Stock Dividends

a. deduction from total paid-in capital and retained earnings.

c. deduction from retained earnings.

d. addition to capital stock.

Effects for Medland Corporation, assuming that it splits its

Part of the stockholders claim on the total assets of the

Debit balance in Retained Earnings is identified as a

14-25 LO 2 Identify the items reported in a retained earnings statement.

Retained Earnings Restrictions

14-26 LO 2 Identify the items reported in a retained earnings statement.

Prior Period Adjustments

14-27 LO 2 Identify the items reported in a retained earnings statement.

14-28 LO 2 Identify the items reported in a retained earnings statement.

14-29 LO 2 Identify the items reported in a retained earnings statement.

Debits and Credits to Retained Earnings

14-30 LO 2 Identify the items reported in a retained earnings statement.

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.

14-31 LO 2 Identify the items reported in a retained earnings statement.

Return on Net Income Available to

Ratio shows how many dollars of net income the company

14-33 LO 3 Prepare and analyze a comprehensive stockholders equity section.

14-34 LO 4 Describe the form and content of corporation income statements.

Income Statement Analysis

Net Income minus

Ratio indicates the net income

14-35 LO 5 Compute Earnings Per Share.