Corporations effects on retained earnings and the income statement
This presentation is the property of its rightful owner.
Sponsored Links
1 / 46

Corporations: Effects on Retained Earnings and the Income Statement PowerPoint PPT Presentation


  • 63 Views
  • Uploaded on
  • Presentation posted in: General

Corporations: Effects on Retained Earnings and the Income Statement. Chapter 13. Stock Dividend . A distribution of a corporation’s own stock Affects only stockholders’ equity accounts No effect on total stockholders’ equity No effect on assets or liabilities

Download Presentation

Corporations: Effects on Retained Earnings and the Income Statement

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Corporations effects on retained earnings and the income statement

Corporations: Effects on Retained Earnings and the Income Statement

Chapter 13


Stock dividend

Stock Dividend

  • A distribution of a corporation’s own stock

    • Affects only stockholders’ equity accounts

      • No effect on total stockholders’ equity

      • No effect on assets or liabilities

  • Stockholders receive proportionate shares

    • Example–10% stock dividend; every stockholder receives 10% of shares distributed

      • Total number of shares issued and outstanding increases

      • Ownership percentages remain the same


Why do companies issue stock dividends

Why Do Companies Issue Stock Dividends?

  • Conserve cash

    • Continue dividends without using cash

  • Reduce market price per share

    • Share supply increases; market price decreases

    • Less expensive; more attractive investment

  • Reward investors

    • Shareholders receive something of value


Entries for stock dividend

Entries for Stock Dividend

  • Same three dates for a stock dividend

    • Declaration date; record date; distribution date

  • Small stock dividend

    • Distribution is less than 20 to 25% of issued shares

    • Debit(Reduce) Retained earnings for market value of shares to be distributed

    • Credit (Increase)Common stock for the par value of the stock and

    • Credit (Increase)Paid-in capital (if applicable) for excess of par—common

  • Total Stockholders Equity does not change


Corporations effects on retained earnings and the income statement

  • Equity after 5% Common Stock Dividend


Entries for stock dividend continued

Entries for Stock Dividend (Continued)

  • Large

    • Distribution is greater than 20% to 25% of issued shares

    • Debit (Reduce) Retained earnings for par or stated value of shares

    • Credit (Increase) Common stock for par or stated value of shares

    • Rare

  • Total Stockholders Equity does not change

  • Assume a second stock dividend of 50%

  • An additional 1,050,000 shares will be issued (2,100,000 x 50%)

  • Total shares issued will be 3,1050,000 shares (2,100,000 + 1,050,000)


Stockholders equity presentation

Stockholders’ Equity Presentation

  • Equity after 50% Common Stock Dividend


S13 2 comparing and contrasting cash and stock dividends

S13-2: Comparing and contrasting cash and stock dividends

Compare and contrast the accounting for cash dividends and stock dividends.

  • In the space provided, insert either “Cash dividends,” “Stock dividends,” or “Both cash dividends and stock dividends” to complete each of the following statements:

    a. ________________decrease Retained earnings.

    b. ________________ has(have) no effect on a liability.

Both cash dividends and stock dividends

Stock dividends


S13 2 comparing and contrasting cash and stock dividends1

S13-2: Comparing and contrasting cash and stock dividends

(Continued)

c. ________________ increase Paid-in capital by the same amount that they decrease Retained earnings.

d. ________________ decrease both total assets and total stockholders’ equity, resulting in a decrease in the size of the company.

Stock dividends

Cash dividends


S13 3 accounting for a stock dividend

S13-3: Accounting for a stock dividend

Yummy, Inc., had 310,000 shares of $1 par common stock issued and outstanding as of December 1, 2012. The company is authorized to issue 1,400,000 common shares. On December 15, 2012, Yummy declared and distributed a 5% stock dividend when the market value for Yummy’s common stock was $3.

Requirements:

1. Journalize the stock dividend.

2. How many shares of common stock are outstanding after the dividend?


S13 3 accounting for a stock dividend1

S13-3: Accounting for a stock dividend

  • Journalize the stock dividend.

    2. How many shares of common stock are outstanding after the dividend?

15,500 x $3

310,000 +15,500 (310,000 x 5%)= 325,500


Stock splits

Stock Splits

  • A stock split:

    • Cuts par value per share

    • Increases the number of shares of stock issued and outstanding

    • Leaves all account balances and total stockholders’ equity unchanged

  • Balances in the accounts are unchanged

  • Record in a memorandum entry–a journal entry without debits and credits


Stock split example 2 for 1

Stock Split Example (2 for 1)

  • Before split

  • After split


Effects of dividends and stock splits

Effects of Dividends and Stock Splits

  • Stock dividends and stock splits have similarities and differences


S13 5 accounting for a stock split

S13-5: Accounting for a stock split

Decorator Plus Imports recently reported the following stockholders’ equity (adapted except par value per share):

Suppose Decorator Plus split its common stock 2 for 1 in order to decrease the market price per share of its stock. The company’s stock was trading at $20 per share immediately before the split.


S13 5 accounting for a stock split1

S13-5: Accounting for a stock split

1. Prepare the stockholders’ equity section of Decorator Plus Imports’ balance sheet after the stock split.


S13 5 accounting for a stock split2

S13-5: Accounting for a stock split

2. Were the account balances changed or unchanged after the stock split?

Unchanged

Unchanged

Unchanged

Unchanged


Treasury stock

Treasury Stock

  • Shares that a company has issued and later reacquired

  • Reasons corporations purchase their own stock:

    • To increase net assets by buying low and selling high

    • To support the company’s stock price

    • To avoid a takeover by an outside party

    • To reward valued employees with stock

  • A common practice among corporations


Accounting for treasury stock

Accounting for Treasury Stock

  • Contra equity account

    • Debit balance

  • Recorded at cost (not par)

  • Reported beneath Retained earnings on the balance sheet

    • Reduction to total stockholders’ equity

  • Decreases outstanding shares

    • Not eligible for dividends

    • Not eligible to vote

Issued stock – Treasury stock = Outstanding stock


Treasury stock transactions

Treasury Stock transactions


Treasury stock journal entries

Treasury Stock Journal Entries

  • Purchase of treasury stock

    • Company debits Treasury stock and credits Cash


Treasury stock journal entries1

Treasury Stock Journal Entries

  • Sale of treasury stock at cost


Treasury stock journal entries2

Treasury Stock Journal Entries

  • Sale of treasury stock above cost

    • Difference is credited to Paid-in capital from treasury stock transactions


Treasury stock journal entries3

Treasury Stock Journal Entries


Treasury stock journal entries4

Treasury Stock Journal Entries

  • Sale of treasury stock below cost

    • Difference is debited to Paid-in Capital from treasury stock transactions, if available

    • Otherwise debit Retained earnings


Treasury stock journal entries5

Treasury Stock Journal Entries


Treasury stock journal entries6

Treasury Stock Journal Entries

  • Sale of treasury stock below cost

    • Paid-in capital from treasury stock transactions is insufficient to cover shortfall

    • Debit Retained earnings for the difference


Treasury stock journal entries7

Treasury Stock Journal Entries


Treasury stock and stockholders equity

Treasury Stock and Stockholders' Equity

  • Reported beneath Retained earnings as a reduction

Authorized shares - 20,000,000

Issued shares - 6,300,000

Outstanding shares - 6,299,700


Corporations effects on retained earnings and the income statement

Treasury Stock


S13 6 accounting for the purchase and sale of treasury stock

S13-6: Accounting for the purchase and sale of treasury stock

Discount Center Furniture, Inc., completed the following treasury stock transactions:

  • Purchased 1,400 shares of the company’s $1 par common stock as treasury stock, paying cash of $5 per share.

  • Sold 400 shares of the treasury stock for cash of $8 per share.

    Requirements

  • Journalize these transactions. Explanations are not required.

  • Show how Discount Center will report treasury stock on its December 31, 2012 balance sheet after completing the two transactions. In reporting the treasury stock, report only on the Treasury stock account.


S13 6 accounting for the purchase and sale of treasury stock1

S13-6: Accounting for the purchase and sale of treasury stock

  • Journalize these transactions. Explanations are not required.


S13 6 accounting for the purchase and sale of treasury stock2

S13-6: Accounting for the purchase and sale of treasury stock

2. Show how Discount Center will report treasury stock on its December 31, 2012 balance sheet after completing the two transactions. In reporting the treasury stock, report only on the Treasury stock account.


Restrictions on retained earnings

Restrictions on Retained Earnings

  • Restrictions

    • Requirement by lenders to maintain a minimum level of equity by limiting:

      • Cash dividend payments

      • Treasury stock purchases

    • Reported in the notes to the financial statements

  • Appropriations

    • Restrictions on retained earnings recorded by formal journal entries

    • Board of directors may designate purpose of appropriation

    • Segregate in a separate account

      • Aportion of retained earnings for a specific use


Stockholders equity with appropriations

Stockholders’ Equity with Appropriations

  • The heading Paid-in capital does not appear

  • All additional paid-in capital accounts are combined


The corporate income statement

The Corporate Income Statement

  • More complex with unique items

  • Public corporations must publish financial statements

  • Sections

    • Continuing Operations

    • Special Items

    • Earnings Per Share

  • Details important to investors


The corporate income statement1

The Corporate Income Statement

  • Continuing Operations

  • Unique items

    • Gain on sales of machinery–other

      • Not core to the business

    • Income tax expense

      • Subtracted to arrive at income from continuing operations

Should continue from period to period

Useful for making projections about future earnings


Special items

Special Items

  • Reported after income from continuing operations

  • Two distinctly different gains and losses:

    • Discontinued operations

    • Extraordinary items


Discontinued operations

Discontinued Operations

  • Segment of a business that has been sold

    • Each segment is an identifiable division of company

  • Reported separately because the segment will not be around in the future

  • Shown net of tax

    • Gain - income tax expense = Gain, net of tax

    • Loss - income tax savings = Loss, net of tax


Extraordinary items

Extraordinary Items

  • Extraordinary gains and losses

  • Both unusual and infrequent

  • Not expected to recur in the foreseeable future

  • Examples:

    • Losses from natural disasters

    • Foreign government takeover (expropriation)

  • Reported net of income tax effect

  • Items notqualifying as extraordinary

    • Gains and losses on the sale of plant assets

    • Losses due to lawsuits

    • Losses due to employee labor strikes

    • Natural disasters that occur frequently in the area


Earnings per share eps

Earnings per Share (EPS)

  • Most widely used business statistic

  • Measures amount of net income for each share of common stock outstanding

    • Issued stock – treasury stock = outstanding shares

  • Key measure of success in business

  • Separate EPS figure for each element of income

    • Income from continuing operations

    • Income from discontinued operations

    • Income before extraordinary item

    • Extraordinary gain or loss

    • Net income


Earnings per share eps1

Earnings per Share (EPS)

  • Calculation

  • Preferred dividends also affect EPS


Eps and preferred stock

EPS and Preferred Stock

  • Preferred dividends must be subtracted from income to compute EPS

    • Preferred dividends are paid first

    • Common will get what is left

      * Assume the annual preferred dividend would be $10,000 (10,000 shares X $1.00 dividend per share)


E13 20 computing eps

E13-20: Computing EPS

Altar, Corp., earned net income of $118,000 for 2012. Altar’s books include the following figures:

Preferred stock, 3%, $50 par, 1,000 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . $ 50,000

Common stock, $2 par, 53,000 issued . . . . . . . . . .106,000

Paid-in capital in excess of par—common . . . . . .460,000

Treasury stock, common, 1,200 at cost . . . . . . . . .. 24,000

  • Compute Altar’s EPS for the year.

    $(118,000 – 15,000)/51,800 = $2.25*

    (2.249034749034749) rounded


Statement of retained earnings

Statement of Retained Earnings

  • Reports how retained earnings changed over the accounting period

  • Corporate dividends appear where drawings would appear in proprietorships or partnerships


Prior period adjustments

Prior-Period Adjustments

  • Corrections for errors of an earlier period

  • Due to the closing of accounts, the error is held in Retained earnings

  • Correction called prior-period adjustment

  • Correcting entry includes:

    • Debit or credit to Retained earnings for error amount

    • Debit or credit to asset or liability account that was misstated

  • Reported on statement of retained earnings


  • Login