14 Corporations: Dividends, Retained

Earnings, and Income Reporting

Learning Objectives
1 Explain how to account for cash dividends.

2 Explain how to account for stock dividends and splits.

Prepare and analyze a comprehensive stockholders’ equity

3 section.

Describe the form and content of corporation income

4 statements.

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 LEARNING
OBJECTIVE 1 Explain how to account for cash dividends.

Distribution of cash or stock to stockholders on a pro rata

(proportional to ownership) basis.

Types of Dividends:

1. Cash dividends. 3. Stock dividends.

2. Property dividends. 4. Scrip (promissory note).

Dividends are generally reported quarterly as a dollar amount

per share.

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 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.

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 Cash Dividends

Three dates are important: Illustration 14-1

Key dividend dates

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 Cash Dividends

Illustration: On Dec. 1, the directors of Media General declare a 50

cents 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.

Dec. 1 (Declaration Date)

Cash Dividends 50,000
Dividends Payable 50,000

Dec. 22 (Date of Record) No entry

Jan. 20 (Payment Date)

Dividends Payable 50,000
Cash 50,000
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 Dividend Preferences

 Right to receive dividends before common stockholders.

 Per share dividend amount is stated as a percentage of

the preferred stock’s par value or as a specified amount.
 Cumulative Dividend Preferred
stockholders must be paid both
current-year dividends and any
unpaid prior-year dividends
before common stockholders
receive dividends.

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 Dividend Preferences

CUMULATIVE DIVIDEND
Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par
value, cumulative preferred stock outstanding. Each $100 share
pays a $7 dividend (.07 x $100). The annual dividend is $35,000
(5,000 x $7 per share). If dividends are two years in arrears,
preferred stockholders are entitled to receive the following
dividends in the current year.
Illustration 14-2
Computation of total dividends to preferred stock

14-7 Advance slide in slide show to reveal dividend amounts. LO 1

 Dividend Preferences

ALLOCATING CASH DIVIDENDS BETWEEN

PREFERRED AND COMMON STOCK
Holders of cumulative preferred stock must be paid any unpaid
prior-year dividends and their current year’s dividend before
common stockholders receive dividends.

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 ALLOCATING CASH DIVIDENDS

Illustration: On December 31, 2017, 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, 2017, the directors declare a $6,000 cash dividend. Prepare
the entry to record the declaration of the dividend.

Cash Dividends 6,000

Dividends Payable 6,000

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

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 ALLOCATING CASH DIVIDENDS

Illustration: At December 31, 2018, IBR declares a $50,000 cash

dividend. Show the allocation of dividends to each class of stock.

2017 2018
Dividends declared $ 6,000 $ 50,000
Dividends in arrears 2,000 **
Allocation to preferred 6,000 8,000 *
Remainder to common $ - $ 40,000

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

** 2017 Pfd. dividends $8,000 – declared $6,000 = $2,000

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 ALLOCATING CASH DIVIDENDS

Illustration: At December 31, 2018, IBR declares a $50,000 cash

dividend. Prepare the entry to record the declaration of the
dividend.

Cash Dividends 50,000

Dividends Payable 50,000

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 Dividends on Preferred and Common
DO IT! 1 Stock

MasterMind Corporation has 2,000 shares of 6%, $100 par value

preferred stock outstanding at December 31, 2017. At December 31,
2017, the company declared a $60,000 cash dividend. Determine the
dividend paid to preferred stockholders and common stockholders
under each of the following scenarios.
1. The preferred stock is noncumulative, and the company has not
missed any dividends in previous years.
Solution
Preferred stockholders are paid only this year’s dividend.
Preferred stockholders = $12,000 (2,000 x .06 x $100).
Common stockholders = $48,000 ($60,000 - $12,000).

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 Dividends on Preferred and Common
DO IT! 1 Stock

MasterMind Corporation has 2,000 shares of 6%, $100 par value

preferred stock outstanding at December 31, 2017. At December 31,
2017, the company declared a $60,000 cash dividend. Determine the
dividend paid to preferred stockholders and common stockholders
under each of the following scenarios.
2. The preferred stock is noncumulative, and the company did not pay
a dividend in each of the two previous years.
Solution
Past unpaid dividends do not have to be paid.
Preferred stockholders = $12,000 (2,000 x .06 x $100).
Common stockholders = $48,000 ($60,000 - $12,000).

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 Dividends on Preferred and Common
DO IT! 1 Stock

MasterMind Corporation has 2,000 shares of 6%, $100 par value

preferred stock outstanding at December 31, 2017. At December 31,
2017, the company declared a $60,000 cash dividend. Determine the
dividend paid to preferred stockholders and common stockholders
under each of the following scenarios.
3. The preferred stock is cumulative, and the company did not pay a
dividend in each of the two previous years.
Solution
Dividends that have been missed (dividends in arrears) must be paid.
Preferred stockholders = $36,000 (3 x 2,000 x .06 x $100).
Common stockholders = $24,000 ($60,000 - $36,000).

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 LEARNING Explain how to account for stock dividends
2
OBJECTIVE and splits.

Stock Dividends
A pro rata (proportional to ownership) distribution of the
corporation’s own stock to stockholders.

Reasons why corporations issue stock dividends:

1. Satisfy stockholders’ dividend expectations without
spending cash.

2. Increase marketability of the corporation’s stock.

3. Emphasize a portion of stockholders’ equity has been

permanently reinvested in the business.

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 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)

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

have little effect on the market price of the outstanding shares.

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 ENRTIES FOR STOCK 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—Common 25,000
Statement Presentation Illustration 14-4

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 ENRTIES FOR STOCK 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—Common 25,000

Record the journal entry when Medland issues the dividend shares.

Common Stock Dividends Distributable 50,000

Common Stock 50,000

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 Stock Dividends

EFFECTS OF STOCK DIVIDENDS

Illustration 14-5

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 Stock 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 an effect on par
value per share of stock.
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 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.

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 Stock Splits

 Issuance of additional shares to stockholders according to

their percentage ownership.

 Reduction in the par or stated value per share.

 Increase in number of shares outstanding.

 Reduces the market value of shares.

 No journal entry recorded.

Helpful Hint
A stock split changes the
par value per share but
does not affect any
balances in stockholders’
equity.

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 Stock Splits

Effect of 4-for-1 stock split for stockholders

Illustration 14-6

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 Stock Splits

Effects for Medland Corporation, assuming that it splits its

50,000 shares of common stock on a 2-for-1 basis.
Illustration 14-7

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 Investor Insight Berkshire Hathaway

A No-Split Philosophy
Warren Buffett’s company, Berkshire Hathaway, has two classes of
shares. Until recently, the company had never split either class of stock.
As a result, the class A stock had a market price of$97,000 and the class
B sold for about $3,200 per share. Because the price per share is so high,
the stock does not trade as frequently as the stock of other companies.
Buffett has always opposed stock splits because he feels that a lower
stock price attracts short-term investors. He appears to be correct. For
example, while more than 6 million shares of IBM are exchanged on the
average day, only about 1,000 class A shares of Berkshire are traded.
Despite Buffett’s aversion to splits, in order to accomplish a recent
acquisition, Berkshire decided to split its class B shares 50 to 1.
Source: Scott Patterson, “Berkshire Nears Smaller Baby B’s,” Wall Street Journal
Online (January 19, 2010).

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 DO IT! 2 Stock Dividends and Stock Splits

Sing CD Company has had five years of record earnings. Due to

this success, the market price of its 500,000 shares of $2 par value
common stock has tripled from $15 per share to $45. During this
period, paid-in capital remained the same at $2,000,000. Retained
earnings increased from $1,500,000 to $10,000,000. President Joan
Elbert is considering either a 10% stock dividend or a 2-for-1 stock
split. She asks you to show the before-and-after effects of each
option on retained earnings, total stockholders’ equity, and par value
per share.

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 DO IT! 2 Stock Dividends and Stock Splits

Sing CD Company has had five years of record earnings. Due to

this success, the market price of its 500,000 shares of $2 par value
common stock has tripled from $15 per share to $45. President
Joan Elbert is considering either a 10% stock dividend or a 2-for-1
stock split.

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 LEARNING Prepare and analyze a comprehensive
3
OBJECTIVE stockholders’ equity section.

Retained earnings is net income that a company retains in

the business.
 Part of the stockholders’ claim on the total assets of the
corporation.

 Debit balance in Retained Earnings is identified as a

deficit.

Illustration 14-10
Stockholders’ equity
with deficit

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 Retained Earnings

RETAINED EARNINGS RESTRICTIONS

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

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 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.

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 RETAINED EARNINGS STATEMENT

Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2017

Balance, January 1 $ 1,050,000

Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,110,000

Before issuing the report for the year ended December 31, 2017, you discover a
$50,000 error (net of tax) that caused the 2016 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2016. Would this discovery have any impact on the reporting of the Statement of
Retained Earnings for 2017?

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 RETAINED EARNINGS STATEMENT

Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2017

Balance, January 1, as previously reported $ 1,050,000

Prior period adjustment - error correction (50,000)
Balance, January 1, as restated 1,000,000
Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,060,000

14-32 Advance slide in slide show to reveal answer. LO 3

 RETAINED EARNINGS STATEMENT

Debits and Credits to Retained Earnings

Illustration 14-13

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 RETAINED EARNINGS STATEMENT

Illustration 14-14
Retained earnings statement

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 RETAINED EARNINGS STATEMENT

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.

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 Statement Presentation and Analysis

Illustration 14-15
Comprehensive stockholders’
equity section

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 Statement Presentation and Analysis

ANALYSIS
To illustrate, Walt Disney Company’s beginning-of-the-year and end-
of-the-year common stockholders’ equity were $31,820 and $30,753
million, respectively. Its net income was $4,687 million, and no
preferred stock was outstanding.
Illustration 14-16

Ratio shows how many dollars of net income the company earned
for each dollar invested by the common stockholders.

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 DO IT! 3 Retained Earnings Statement

Vega Corporation has retained earnings of $5,130,000 on

January 1, 2017. During the year, Vega earned $2,000,000 of
net income. It declared and paid a $250,000 cash dividend. In
2017, Vega recorded an adjustment of $180,000 due to the
understatement (from a mathematical error) of 2016
depreciation expense. Prepare a retained earnings statement
for 2017.

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 DO IT! 3 Retained Earnings Statement

Prepare a retained earnings statement for 2017.

14-39 Advance slide in slide show to reveal the missing amounts. LO 3

 LEARNING Describe the form and content of
4
OBJECTIVE corporation income statements.

Income
Statement
Presentation

Illustration 14-17
Income statement
with income taxes

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 Income Statement Analysis

EPS AND PREFERRED DIVIDENDS

Net Income minus
Earnings Per Preferred Dividends
=
Share
Weighted-Average Common
Shares Outstanding

Ratio indicates the net income

earned by each share of
outstanding common stock.

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 Income Statement Analysis

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.

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 People, Planet, and Profit Insight

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 DO IT! 4 Stockholders’ Equity and EPS

(a) Compute return on common stockholders’ equity for each year.

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 DO IT! 4 Stockholders’ Equity and EPS

(b) Compute earnings per share for each year.

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 A Look at IFRS

LEARNING Compare the accounting for dividends, retained

OBJECTIVE 5 earnings, and income reporting under GAAP and IFRS.

Key Points
Similarities
 The accounting related to prior period adjustment is essentially the
same under IFRS and GAAP.
 The stockholders’ equity section is essentially the same under IFRS
and GAAP. However, terminology used to describe certain
components is often different. These differences are discussed in
Chapter 13.

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 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. Regardless of
which approach is reported, income tax expense is required to be
reported.
 The computations related to earnings per share are essentially the
same under IFRS and GAAP.
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 A Look at IFRS

Key Points
Differences
 Under IFRS, the term reserves is used to describe all equity
accounts other than those arising from contributed (paid-in) capital.
This would include, for example, reserves related to retained
earnings, asset revaluations, and fair value differences.
 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.
 Equity is given various descriptions under IFRS, such as
shareholders’ equity, owners’ equity, capital and reserves, and share
holders’ funds.

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 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.

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 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.

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 A Look at IFRS

IFRS Self-Test Questions

Under IFRS, a statement of comprehensive income must
include:

a) accounts payable.

b) income tax expense.

c) retained earnings.

d) preference stock.

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 A Look at IFRS

IFRS Self-Test Questions

Earnings per share computations related to IFRS and GAAP:

a) are essentially similar.

b) result in an amount referred to as earnings per share.

c) must deduct preferred (preference) dividends when

computing earnings per share.

d) All of the answer choices are correct.

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 Copyright

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