CH 14

14-1
CHAPTER14
Corporations:
Dividends,
Retained
Earnings, and
Income Reporting
14-2
PreviewofCHAPTER14
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.
Dividends expressed: (1) as a percentage of the par or

stated value, or (2) as a dollar amount per share.
14-4 SO 1 Prepare the entries for cash dividends and stock dividends.
Dividends
Three dates:
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
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 before common
stockholders receive dividends.
Dividends
Illustration: On December 31, 2012, 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, 2012, the directors declare a $6,000 cash dividend.
Prepare the entry to record the declaration of the dividend.

Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000
Dividends
Illustration: At December 31, 2013, IBR declares a $50,000

cash dividend. Show the allocation of dividends to each class of
stock.
2012 2013
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

** 2012 Pfd. dividends $8,000 – declared $6,000 = $2,000
Dividends
Illustration: At December 31, 2013, IBR declares a $50,000 cash

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

Dividends payable
50,000
14-12
Dividends
Stock Dividends Illustration 14-3
Pro rata distribution of the corporation’s own stock.
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 corporation’s stock.
3. Emphasize a portion of stockholders’ equity has been

permanently reinvested in the business.
Dividends
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.
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

Stock dividends (5,000 x 10% x $40) 20,000
Common stock dividends distributable 500
Paid-in capital in excess of par value 19,500
Stock issued
Common stock dividends distributable 500
Common stock (5,000 x 10% x $1) 500
Dividends
Stockholders’ Equity with Dividends Distributable
H H In c.
B alance S heet (p artial)
S to ckh o ld e rs' eq u ity
P aid-in ca pital
C om m o n stock, $ 1 p ar, 5,000 issued
and outstand ing $ 5,0 00
C o m m o n sto ck d ivid en d s d istrib u ta b le 500
P a id-in capital in excess of p ar 64,500
Retained ea rnings 90,000
T o tal sto ckh o ld ers' eq u ity $ 160,000
Dividends
Effects of Stock Dividends

HH Inc. Before After Net
Dividend Dividend Change
Stockholders' equity
Paid-in capital
Common stock, $1 par, 5,000 issued
and outstanding $ 5,000 $ 5,500 $ 500
Paid-in capital in excess of par 45,000 64,500 19,500
Retained earnings 110,000 90,000 (20,000)
Total stockholders' equity $ 160,000 $ 160,000 $ 0
Outstanding shares 5,000 5,500
Book value per share $ 32 $ 29
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 Split
 Reduces the market value of shares.
 No entry recorded for a stock split.
 Decrease par value and increase number of shares.
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.
Dividends
Effects of Stock Splits
HH Inc. Before After Net

Split Split Change
Stockholders' equity
Paid-in capital
Common stock $ 5,000 $ 5,000 $ -
Paid-in capital in excess of par 45,000 45,000 -
Retained earnings 110,000 110,000 -
Total stockholders' equity $ 160,000 $ 160,000 $ -
Outstanding shares 5,000 10,000

Book value per share $ 32 $ 16
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 SO 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.
Companies generally disclose retained earnings restrictions in

the notes to the financial statements.

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
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2012
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, 2012, you discover a
$50,000 error (net of tax) that caused the 2011 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2011. Would this discovery have any impact on the reporting of the Statement of
Retained Earnings for 2012?

Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2012
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

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 and Analysis
Stockholders’
Equity
Presentation
Illustration 14-15
14-32 SO 3
Stockholders’ Equity 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 SO 3 Prepare and analyze a comprehensive stockholders’ equity section.

Illustration 14-17
Income
Statement
Presentation
14-34 SO 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 SO 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 SO 5 Compute Earnings Per Share.

Key Points
 The term reserves is used in IFRS to indicate all non–
contributed (non–paid-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.
14-37
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
shareholder’s equity, owners’ equity, capital and reserves, and
shareholders’ funds.
14-38
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.
14-39
Looking into 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.
14-40
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.
14-41
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.
14-42
Under IFRS, a statement of comprehensive income must
include:
a) accounts payable.
b) retained earnings.
c) income tax expense.
d) preference stock.
14-43
Copyright
“Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
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
errors, omissions, or damages, caused by the use of these programs
or from the use of the information contained herein.”
14-44

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CH 14

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14-1

Distribution of cash or stock to stockholders on a pro

1. Cash dividends. 3. Stock dividends.

2. Property dividends. 4. Scrip.

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

1. Retained earnings - Payment of cash dividends from

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

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

Illustration: On December 31, 2012, IBR Inc. has 1,000 shares

Cash dividends 6,000

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

Illustration: At December 31, 2013, IBR declares a $50,000

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

Illustration: At December 31, 2013, IBR declares a $50,000 cash

Cash dividends 50,000

Stock Dividends Illustration 14-3

Pro rata distribution of the corporation’s own stock.

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

1. Satisfy stockholders’ dividend expectations without

2. Increase marketability of the corporation’s stock.

3. Emphasize a portion of stockholders’ equity has been

 Large stock dividend (greater than 20–25% of issued

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

Illustration: HH Inc. has 5,000 shares issued and outstanding.

10% stock dividend is declared

Stockholders’ Equity with Dividends Distributable

Effects of Stock Dividends

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

c. deduction from retained earnings.

d. addition to capital stock.

 No entry recorded for a stock split.

 Decrease par value and increase number of shares.

Illustration: HH Inc. has 5,000 shares issued and

2 for 1 Stock Split

No Entry -- Disclosure that par is now $.50 and shares

Effects of Stock Splits

HH Inc. Before After Net

Outstanding shares 5,000 10,000

 Net income increases Retained Earnings and a net

 Part of the stockholders’ claim on the total assets of

 Debit balance in Retained Earnings is identified as a

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

Retained Earnings Restrictions

Companies generally disclose retained earnings restrictions in

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

Prior Period Adjustments

 Adjustment made to the beginning balance of retained

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

Balance, January 1 $ 1,050,000

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

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

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

Debits and Credits to Retained Earnings

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