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CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING. Prepare the entries for cash dividends and stock dividends. Identify the items reported in a retained earnings statement. Prepare and analyze a comprehensive stockholders’ equity section.

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CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING


Study objectives

Prepare the entries for cash dividends and stock dividends.

Identify the items reported in a retained earnings statement.

Prepare and analyze a comprehensive stockholders’ equity section.

Describe the form and content of corporation income statements.

Compute earnings per share.

Study Objectives


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 Reporting

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 Reporting

Dividends require information concerning three dates:


Dividends2

Cash Dividends Reporting

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

See page 596 - 597


Dividends3

Illustration: ReportingWhat 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)

Retained earnings 50,000

Dividends payable 50,000

March 25 (Date of Record)No entry

April 6 (Payment Date)

Dividends payable 50,000

Cash 50,000

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


Dividends4

Allocating Cash Dividends Between Preferred and Common Stock Reporting

Dividends

Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends.

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


Dividends5
Dividends Reporting

ExerciseArnez Corporation was organized on January 1, 2008. During its first year, the corporation issued 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, $6,000, 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 Reporting

Exercise(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 Reporting

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 $6,000 = $3,000

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


Dividends8
Dividends Reporting

Exercise(c) Journalize the declaration of the cash dividend at December 31, 2010, under part (b).

Journal entry:

Retained earnings 28,000

Dividends payable 28,000

See another illustration page 598 -599


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