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CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING. CHAPTER 14. Accounting Principles, Eighth Edition By Louis Hwang and John Burneson. Corporations: Dividends, Retained Earnings, and Income Reporting. Dividends. Retained Earnings. Statement Presentation and Analysis.

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chapter 14
CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTINGCHAPTER 14

Accounting Principles, Eighth Edition

By Louis Hwang and John Burneson

slide2

Corporations: Dividends, Retained Earnings, and Income Reporting

Dividends

Retained Earnings

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

dividends
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.

dividends1
Dividends

Dividends require information concerning three dates:

LO 1 Prepare the entries for cash dividends and stock dividends.

slide5

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dividends2
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.

Dividends

LO 1 Prepare the entries for cash dividends and stock dividends.

dividends3
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?Dividends

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.

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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.

Cash Dividends - Preferred StockCash dividends must be paid first to preferred stockholders beforeany common stockholders are paid.
dividends4
Dividends

If you are a company, which stock do you want to offer?

If you are a shareholder, which do you want to own?

dividends5
Dividends

ExerciseArnez 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.

dividends6

*

Dividends

ExerciseArnez 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.

dividends7
Dividends

ExerciseAt 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.

dividends8
Dividends

ExerciseAt 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.

dividends9
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.

dividends10
Stock Dividends

Pro rata distribution of the corporation’s own stock.

Dividends

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.

dividends11
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.

Dividends

LO 1 Prepare the entries for cash dividends and stock dividends.

stock split
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.

dividends12
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.Dividends

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.

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