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Understanding Dividends and Retained Earnings in Corporation Accounting

Learn about cash dividends, stock dividends, retained earnings, and income reporting for corporations. Understand dividend types, entries, and stockholder equity. Analyze income statements and stock splits.

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Understanding Dividends and Retained Earnings in Corporation Accounting

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  1. CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING CHAPTER 14 Accounting Principles, Eighth Edition

  2. 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

  3. 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.

  4. Cash Dividends For a corporation to pay a cash dividend, it must have: Retained earnings – Adequate cash. A declaration of dividends Dividends LO 1 Prepare the entries for cash dividends and stock dividends.

  5. Dividends Dividends require information concerning three dates: LO 1 Prepare the entries for cash dividends and stock dividends.

  6. 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.

  7. 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.

  8. Dividends If you are a company, which stock do you want to offer? Why? If you are a shareholder, which do you want to own? Why?

  9. 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.

  10. * 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.

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. 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.

  17. 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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