Retained Earnings

1. Retained Earnings ACCTG 5120 David Plumlee

2. Retained Earnings Undistributed Prior Earnings What items or events decrease RE? What items or events increase RE? • net losses • dividends • prior period adj.(error corrections) • treasury stock adj. • net income • prior period adj. • adjustment to eliminate a deficit position in a quasi-reorganization

3. What are some of the different types of dividends? Dividends cash stock property script liquidating

4. Date of declaration-- date dividend declared by Board of Directors retained earnings xxx dividends payable xxx Date of record -- individuals holding stock this date receive dividend Date of payment -- date dividend is actually paid Important Dates What are the important dates for dividends?

5. Property Dividend What is a property dividend? Dividends paid in non-cash assets such as stock of another company How is accounting for Stock Div. Different? • On the date of declaration, write the asset up or down to its FMV and record the resulting gain or loss • The dividend amount recorded is equal to the asset’s FMV

6. Scrip and Liquidating Dividends What is a script dividend? • dividend is declared, but payment is promised at a later date • shareholders are given a note, which may bear interest • any interest accruing on the note should be charged to interest expense in the appropriate period What is a liquidating dividend? • any dividend that is not paid out of retained earnings • it represents a return of capital it is charged against additional paid in capital

7. Stock Dividends Do stockholders benefit economically from stock dividends? • More are shares outstanding, but they still own the same proportion • Its total market value of the is not increased, share price should drop proportionately Why issue a stock dividend? • Reduce stock price to increase marketability • Permanently capitalize retained earnings

8. Recording Stock Dividends What makes a stock dividend “small?” Issuing less than a 20 - 25% stock of the previously outstanding stock How should you account for small vs. large stock dividends? For small, the fair value of the stock to be issued is transferred from RE. Large use par value.

9. Stock Splits vs. Stock Div. 2 for 1 Stock Split100% Stock Dividend What happens to the # of shares? # shares double # shares double What happens to the market price? cut in half cut in half What JE is made? Memo only; cut par Entry to transfer r/e in half Signal intent to permanently reinvest some firm’s earnings Why would management choose? Primary concern: manipulating stock price

10. Appropriations of RE • Reclassified for a specific purpose (e.g. debt covenant requirement or anticipation of a loss) • Does not involve cash • Nothing can be charged against appropriated retained earnings • Creation and elimination involves only unappropriated retained earnings Appropriation of retained earnings does not mean that cash will be available

11. Appropriation Entries How do you setup appropriated R/E? Unappropriated R/E xxx Appropriated R/E xxx How do you eliminate appropriated R/E? Appropriated R/E xxx Unappropriated R/E xxx

12. Quasi reorganizations What is a quasi reorganization? A quasi-reorganization is designed to allow the company to appear to have dissolved, paid of any creditors that want out, and reformed the company without making it go through the expense of actually going through a formal dissolution and reformation.

13. Quasi-Reorganization Justified When... • A significant deficit balance in R/E • Cost basis of assets fails to reflect going-concern value • Break with historical cost concept viewed as necessary • Fresh start appears advantageous to all parties • Approved by shareholders and creditors

14. Quasi-Reorganization Procedures What is done with the existing asset and liability balances? Restate them to fair values and adjust RE for the difference. What is done with the deficit in RE? Eliminate it against other capital accounts • paid in capital in excess of par • capital stock