576 4corporationsDlvidendsf Retained EarningsJ and lncome Reporting

Terms are highhghted in bIue throughoutthc chaptcCash didend A pro rata distribudn of cash to stock~

holdcrs,DecIaration date The date the bard of directors fo

ma11y dcclares(authorizes)a dividcnd and announcesit to stckholdcrs

Def:cit A dcbit balance in retaincd earnings.Di idend A corporationdistribuJonf cash or stock

to its stockhldcrsn a pro rata(proportional)basis.Earnings per share The nct income carned by each

sharef outstanding common stockLiquidating diidend A dividend declared out of paid-

in capitalPayment date Thc date dividcnd chccks arc1nailed to

stockholdcrsPrior period adJustment The coection of an eor in

previously issued Jf:inancial statemcnts.Record date The date xxJhcn oxvnership ofutstanding

sharcs is dctcr1incd for dividend purposesRetained earnings Nctincome that a company retains

in thc busincss.

Retaned earnings restrictions Circumstanccs 1|make a poIion of retained earnings currcndy unaIable for dividends

Retained earnings statement A nancial statem:=that shoxxrs the changcs in retained carnings during=yca

Return on colmon stockhoIdersf equity A lmcaxLof prntabity that shows hw many doars of|income were carncd for cach do1lar investcd b toxvncrs; computed as nct income n1inus prefeIitdividcnds dividcd by average co11n0n stockhol:|equity

stock diidend A pro rata distribudon to stockhljof the colporationovn stock

stockhoIdersJ equ:ty statement A statcment rshovs the changesin each stckholdcrsequity acc[and in tta1stckhlderscquity during the ycan

stock spt The issuance of additional shares of stocL1tstockhlders according to their pcrcentage o/nepI;It is accompanicd by a reduction in thc par or stI:valuc per share,

'4L9zs/~s,zB/odlz9zbo lbfrr Prspcrv

(L01) 1 Entries for cash dividcnds are rcquircd on thc(a) dcclaratin date and thc payment date,(b) rccord date and thc payment date,(c) dcclaration date,rccord date,and payment date.(d) declarauon datc and the rccrd date.

(LO1) 2 Which of the fo11oxving statemcnts about sma11stockdividends is trueP(a) A debit to Rctaincd Earnings fr the par valuc of

thc sharcs issucd should be rnade,(b) A sma11 stock dividcnd decrcases total stock~

holdcrsequitl/.(c) Iarkct pricc per sharc should bc assigned tthe

div1dcnd shares,(d) A smal1 stock div1dend rdinarny 1l havc an

effcct on par valuc per sharc of stock(LO1) 3 Vhich of the fo11ong statemcnts about a 3~fo1

stock sphtis true?(a)It wil1tnplc thc markct pricef the stock.

if:f(L01) Encorc Inc deClared an$8o,000cash dividcnd It cu

rendy has3,0oo shares of7%,$100par va1uc cumula-tive prcferrcd stock utstanding. It is one year inaears on its prcferrcd stock.Hoxkr much cash willEncorc distributc to thc c1In0n stockholdersP(a) $38,000(b) $42,000

(c) $59,000(d)None

5. Raptr Inc. has rctaincd earnings of $500,000 total stockholdersequity of$2,000,000 It has1oo C|shares of$8 par valuc common stock outstandrwhich is currcntly se11ing for$3o pcr share,If Ra1ideclares a10%stock dividendn its co11110n stOJl(a) net incmcl1decrcase by$80,000(b)hhCd earnhgs wi11dccasc by$80,000=

eyand ttal stockho1ders equity o11 increas -$300,000.

(d) retained carnings o11dccrcase by$300,000=total paid in capital wl increase by$300,00C

6. Which f thc foong can cause a restricti retained carnings?(a) State la

`s regarding treasury stock(b) Longtcrn1debt contract tcrms(c) Authorizaons by thc board of dircctrs in lii

of planncd expansion of crporatc facities(d) A11ofthc abve.

7. A11but one ofthe fo11`ing is reponcd in a retaicarnings statement.The cxception is

(a) cash and stock dividcnds,(b) nct incme and nctlss(c) salcs revcnuc.(d)prior pcridaustments

8.A pr0r period austmcnt is(a) reported in thc i11come statemcnt as a nontTi

itern.

(b) a corrcction of an error that is recordcd dircct1yto retained carnings

(c) repolted direcdy in the stockho1dcr equny scctiontt:in:tT%:

carnlngs.In the stockholdcrs cquity section, Co1nmon stockDividends Distributable is repolied as a(n)(a) deductionolll tota1paid in capital and rctaincd

earn1ngs,(b) addition to additional paid-in capita1(c) dCduchon f1onretained earnings(d) additln to capita1stockKatic Inc. rcportcd nct incomc of $186,000 during2014and paid dividends of$26,000on con11non stoCkIt also has10,000shares of693,$100par value,non-cumu1ative prefcrred stock outstanding and paid divi-dends of $60,000 on prefcrred stock Co1nmonstockholders equity xvas $1,200,000 on January 1,2014, and $1,600,000 on Dccember 31, 2014 Thccompany1rcturn on common stoCkholdcrsequy for2014is(a) 10093.(b) 9093Thc rcturn on CollllIlon|f:i1ncd as

( 71%(d)133%.

stockholdersequity is dc-

(a) net incme divided by tota1assets(b) cash dividends divided by averagc common stock-

holderscquity.(c) inclnc aVai1able to collln10n stockho1dcrs

dividcd by average con11on stockholdersequity(d)Noncf thesc is corrcct

Questions 577

During2014,Ta1on Inchad sales revcnuc$376,000, (LO4)

::st::n:7fJ

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n6f

::

$20,000 Its corporatc tax rate is30% Vhatxvas Talonincome tax expcnse for thc year?

12.

?

(a) $18,000,(b) $52,800

(c) $112,800(d)$27,000,

13.Corporauon incmc statcmcnts may bc the samc as (LO4)thc income statemcnts for unincorporatcd companiesexcept for(a) gross prot(b) incomc taX expcnse(c) perating income.(d)net sa1es.

14.If cvewthing e1sc is hc1d constant,earnings per sharc (LO5)1s lncrcased by(a) thC payment of a cash dividend to common sharc-

holders(b) thC payment of a cash dividcnd to prcferrcd

sharcho1dcrs,(c) the issuance of nev sharcs of common stoCk

6.:r: 1nshoncombcforc income taxes $700,000, income tax expcnse$210,000, and nct incomc $490,000 If Nadecn has100,000shares of co1Inon stock outstanding through-out thc yea,earnings per sharc is(a) $7.00.(b) $490(c) $210(d)No corred answer o ghcn

t (a) What is a dividendP(b)Dividends rnust bc paidin cash.Do you agrce?Explain

2 Jan BIller maintains that adequate cash is the on1yrcqtircment for the dcclaration of a cash dividend IsJan correct?Exp1ain

: (a) Threc datcs arc impoltant in connectionvithcash dividcnds IdentithCse dates,and cxp1aintheir significancc to the C0rporation and its stock-holdcrs

(b) IdCnu: the accounting cntrics that are1nade for

a cash dividcnd and thc datc of each cn")1|.Farley Inc declares a $55,000 cash dividcnd on

Dcccmber31,2014,The rcquircd annual dividend onprcfcrred stock is$10,000.Detcrnc thc a11ocationofthc dividcnd to prcfcrrcd and colll1uon stoCkho1dersassu1ing the prefcrred stock is cumulative and divi-dcnds arc onc year1n arrears

,Contrast the cffects of a cash dividend and a stockdividend on a corporation1sba1ancc shect

j,Rich Mordica asks, Sincc stock dividends don1change anything,vhy dec1are thcm?lA/hat is youranswer to Rich?

7.Gorton Corporation has 30,000 sharcs of $10 parvalue common stock outstandingvhcn it announccsa2~fo1stock spht.Bcfore thc spht,the stock had amarkct pricc of$120pcr shareAftcr thc spht,howmany sharcs of stock`i11bc OutstandingP What

tx/i11

be the approxilllate n1arket price pcr sharc?8 Thc board of directors is considcring cither a stock

spht or a stock diVidcnd They understand that totalstockholderscquityvillrcmain the samc undcr eithcraction Hoxkrcve they arc not sure of the diercntcffects of thc txvo tvpes of actions on other aspects ofstckholder equi Explain the diffcrenccs to thedircctors

9.Whis a prior pcriod austmCnt,and how is it

j F nhbdancc d$230,000on Janualr1 During the ycaa prior periodaustment f $50,000 is recorded because of thCundcrstatcment odcprcciation in thc prior periodshoxkzthe rctaincd earnings staten1cnt presentation ofthcsc data

AP

578 4cOrporationsDiVidendsf Retained EarningsJ and Income Reporting

11.Vhat is thc purpose of a retained earnings restric-tion?Identifv the possible causes of retained earningsrestrictions

12.Hov are rctaincd carnings rcstrictions general1yrcportcd in thc nancial statcmcntsP

13.Idcnt"thC Cvcnts that result in dcbits and crcdits torctaincd carnings.

14.RaFurcaI bcheves that both the beginning and end-ing balances in retained earnings are shoxvn in thestckhldersequity section Is Rafv correct?Discuss.

15.Dean Percival,vho oxNrns rnany inVestmcnts in comon stock,says,I don1carc what a companynet

income is.The stock pricc tcl1s lllc cvc9thing IJLto knov!Hoxkl do you respond to Dcan?

16.What is the unique feature of a corporation incstatcmcnt? I11ustrate this feature, using ass==data

17 Why must prcfcrrcd stock dividends be subtrf1on1netincomc in computing earnings per shar

18.Vhat`ere the amounts of basic carnings per shr

||

common stock that Apple rcportcd in the ycarsl}to2011P

B 14 Greenxvood Colporation has80,000shares ofcommon stock outstanding It declaresa$1per share cash dividcnd on Novcmber1to stockholdcrs of rccord on Dcccmber1.Thedividcnd is paid on Dcccmbcr31.Prcparc thc cntries on the appropriate dates to rccordthc dcclaration and payment ofthe cash dividend,BE 4 2 Langlcy Corporation has50,000sharcs of$10par value co1Inon stock outstand-ing,It dcclares a159b stock dividend on December1vhen the market price per sharc is$16 The dividend shares are issued on December31 Preparc the entries for the dcclara-tion and payn1ent of thc stock dividend.BE143 The stockholderseq1ity section of Prctzcr Corporation consists of comn1on stock($10par)$2,000,000and retained earnings$500,000A1093stock dividend(20,000shares)is dcc1arcd whcn thc rnarkct pricc pcr share is$14 shoxxz thc befre-and-affer cffccts ofthe dividend on thc folloxving,(a) Thc componcnts of stockho1dcrscquit5(b)Shares outstanding,(c) Par value per shareB44 For the year cnding Dcccmbcr31,2014,soto Inc.repo1ts net incomc$170,000and dividends$85,000 Prepare the retaincd carnings statcment for the year assu1ing theba1ance in retained earnings on Januay1,2014,vas$220,000.B 14 5Thc balanccin rctaincd carnings on Januaw1,2014,for PahncrInc.vas$800,000During the yeathe corporation paid cash dividends of$90,000and distributed a stockdividcnd of$8,000 In additin,the company dctcrned thatit had undcrstatcd its deprc-ciation cxpcnsc in prior years by$50,000Nctincomc for2014vas$120,000 Prepare theretained earnings statcmcnt for2014.8E 46SUPERVqLU,one of the largest grocct/rctailcrs in the Uncd states,is head-quartered in Nnncapohs.suppose the fo11ong fnancia1information(in11ions)xvastaken f1onthe company2014annual repoItnet salcs$40,597,netincome$393,begin-ning con11non stockholdcrs cquy $2,581 and ending conn stockholders equity$2,887 Compute the retum on common stockholdersequity.BE 4 7 Vhctzcl Colporation repoIted nct income of$152,000` dcc1ared dividends oncommon stock of$50,000,and had an ending balance in retained earnings of$360,000Common stockho1dcrscquity ` as$700,000at thc bcginning of the year and$820,000atthc end ofthe yeaComputc thc rcturn on common stockho1dcrsequityBE148 Thc fo11owing information is avaab1c for Rcinsch Covoration forthc year endedDecember31,2014cost of goods sold$205,000,salcs rcvcnue$350,000,othcr revenuesand gains$50,000,and opcrang expenses$75000 Assunng a corporate tax ratc of30q3prepare an income statemcnt for thc con1pany

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BE 4 9 zieglcr Corporatin repo1s nct incomc of$380,000and a weighted-average of

::u: commn stock outstanding for the ycaColllpute thc earnings per sharcBE14 1o Income and colllllaon stock data for Zicgler CorporaJon arc prescnted in BE14~9.

:1;:t: :JFI :;;:ll;::F

Exercises 579

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E14 0n Janualr 1, Gulen Corporation had95,ooo sharcs of no-par common stockkxucd and outstandingThe stock has a statcd valucf$5pcr sharc During the yeathei=owlng occurred.

pr 1 Issucd25,0o0additional sharcsf common stock for$17per share.

s F shcockhdds d Kcoon Junc

Dec 1 Issued2,000addtional shares of cmmon stock fr$19pcr share.15 Declared a cash dividend on outstanding shares of$120pcr share to

stockholders of record on Dccember31rrJrcos

i: elll clat Dccember31P142 Knudsen Corporation was organized on January1,2013 During its nrst yCathe:poration issucd2,0oo sharcsf$50par value prefcrred stock and100,000shares of$1or valuc common stock At December31, the cmpany declared the folloving cashidends2o13,$5,000;2o14,$12,000;and2o15,$28,000. r, JrcroPIs{)Sho/thc allocatin of dividcnds to cach class of stock,assu1ing the prefcrred stckdividend is693and noncumulativc.)shw thc a1location of dividends to each class of stock,assu1ing the preferred stock

dividend is793and cumulativc.|Journahze the dcclaratln ofthe cash dividcnd at Dccember31,2o15,under part(b).:i:lil;;:iI

`::esE

{Il1:::0sharesfcommon stock at par on July I and earned netincme of$400,000-Icr9srnahzc thc declaration of a15%stock dividcnd on Decembcr10,2014,for the fo11o

v~lndcpcndcnt assumptions.Par value is$1o,and1narket pricc is$18Par value is$5,and rnarket price is$20.4 0n October31,thc stockholdersequity section of Heins company consists ofmon stock$500,000and retaincd earnings$90o,000 Heins is considering the f

11wingMrj Courscsf actin (1)declaring a5q3stock dividendn thc5o,00o, $1o par valuelrcs outstanding,or(2)effecting a2-fol1stock spht that 11reduce par va1uc t$5pcr~^ 1~ . ^~ ~

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(a)Ttadividends declared$266`400

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Dividends tpreferred(a)2015$6`000(b)2015$7`000

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Debit tRetained Earnings(a)$378`000(b)$720000Co,9zp7iFjzzc scdvfPzlzdsroc~sp`J/(LO1)`AP

.The currcnt rnarkct price is$14per share,

rc a tabular summap/of the cffects of the alternative actinsn the componcnts of1oldcrscquity outstanding shares,and par valuc per share.use the fo11owing coIumn

Par valueafter stckdividend$10j after stocksp"t$5ingsBefore Action,After stock Dividend,and After Stck spht.

580 14crporations

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(b)Cmmn stock$440`000Paid in Capita|in Excessof ParCommon stock$105`000Retained Earnings$35`000

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Dividends`Retained Earnings`and lncome Reporting

E 4 5 0n October1,Little Bobby Corporaonstockhldcrscquity is as fo11oxxzs

Common stock,$5par va1ue $4o0,000Paid in capitalin cxccss of par~common stock 25,000Retained earnings 155,000

Tota1stockho1dersequity $580,000

on October1,Little Bobby dec1ares and distributes a1093stock dividcndvhen the n1arlpricc of thc stock is$15per share

Js',rcr

9s(a) Compute the par value per sharc(1)beforc the stock dividcnd and(2)after the sti

dividend(b) Indicate thc balances in the thrcc stoCkholdersequy accounts aftcr the stock dhidc=

shares have been distributed,

146 During2014,Rob1ez Corporation had thc fo11ong transactions and cvcnts1. Declared a cash dividcnd.2.Issued par valuc common stock for cash at par valuc.3.Completed a2-foF1stock spht in which$10par valuc stckvas changed t$5 :t

value stock4. Dcclarcd a sn1a11stock dividcndvhen the rnarkct price xhras higher than par valuc5.Madc a prior podaustmel.t brovatcmcnt of net hcme,6. Issucd thc sharcs of common stock requircd by thc stck dividend dcclaration in it=no,4abovc.7.Paid the Cash dividend in itcIn no 1aboVe8.Issued par valuc c1Inon stock for cash above par value

r9,sfr/JcrJo9IsIndicate the effcct(s)of cach of the foregoing itcms on the subdivisions of stockhld:r|Cqui0Present your answer in tabular form with thc fo11owing columns.Use(Il fcincrcasc(D)for decrease,and(NE)for no cffect Iten1no 1is given as an cxample

Paidin Capal

IteIll

1

Capalstock

RetnedEanigsAdditiona1

NE NE DE14 7 Bcfore preparingnancial statements for the current ycathe Chief accountant:cToso Company discovered the fo11o

`ing errors in the accunts.1. Thc declaration and paymcnt of$50,000cash dividendvas recorded as a debitto Intc1sl

Expcnsc$50,000and a Credto Cash$50,000.2.A1093stck dividend(1,000sharcs)vas declaredn thc$10par valuc stock sVhen=1=

market price per share was$18The only entin1ade was stock Dividcnds(D)$10Cand Dividcnd Payab1c(C)$10,000 The sharcs have nt bcen issued,

3.A4-fo1stock sphtinvo1ving thc issuc of400,000shares of$5par valuc common stciJ1for100,000sharcs of$20par valuc common stockvas recordcd as a dcbit to RetaiL:Earnings$2,000,000and a credit to Corlllllon Stock$2,000,000.

rPsrrJJcJo,asPrcparc the corrccting cntries at Dcccmber31,

E14 8 0n Januay1,20I4,Eddy Colporation had retaincd earnings of$650,000,Duhthe yeaEddy had the fo11ong sclccted transactions,1. Declarcd cash dividends$120,0002. Corrccted oVerstatement of2013netincomc becausc of depreciation error$40,0003.Earncd netincme$350,0004.DccIarcd stock dividends$90,000

r,sJcfo9rsPrcparc a retained earnings statcmcnt for the ycaEnding ba|ance$750000

lfJ)iation expenscvas rccorded at$70,000,but

)clared and paid,tr1butcd whcn thc rnarkct pricc pcr share was

4,Net hcome was$285,00orr'%c9sPrepare a retaincd carnings statcment for2o14,

:uIty:l

00r$G

rPIsrPr/co,s

lFrCthestckhddcrscquysuon d cmpanys Dccemb31,2o14balance

::c1Jl[c:: ccunts appear in the ledger of Hrncr Inc,after thc bks arcCommon stck,no pa$1statcd value,4oo,ooo shares authorizcd;300,ooo shares Issued

Co1Inon Stock Dividends DistributablePaid~in Capitalin Excess of statedhlue__collallln stock

&vu:%,4000shRetained Earningsrreasury Stock(10,000common shares)Paidn CapaIin Excess of Par~Prcfecd stck

$ 300,0oo30,0oo

1,200,ooo

150ooo800,ooo74,ooo

344,ooo

Exercises 581

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(a)Netincome$129`5oo

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:11f:|:: t:;i :;l ,sng edrmn

: : acsutstanding during the entire ycarrP=rcoPs

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582 4Corporations

EPs$215

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2014EPs$27o

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EPs`2014`$120

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$225

(b)$250

:: :FErsDividcnds paid to prefelred stockhldersNctincmearkct price of con11non stock

Thcvcighted~avcrage number of sharcs of common2013and10o`ooo for2014.rPasr,rCroPJs

j1;IfI::;;:l:rsDividcnds paid to prefeed stockhldersNetincmeIarket pricc of co1Inon stock

Theveighted~avcragc number of sharcs2013and15o,ooo for2014.rmsr'cs

of common stock outstanding `as180,ooo fr

$1,200,000200ooo600,0oo

DividendsJ Retained Earningsf and Incme Reporting

rsrc?sComputc Ringgold2014carnings pcr sharc

E14 5The fIlowing nnanal informat0n o availablc for PlummColporation.

2014$1,200,000

50,0oo20 0oo

290,0oo20

2014$1,800,000

90,00020,00o

200,00o20

2013$900,000

30 00020,0oo

200,0oo15

2013$1,900,000

70,00020,00o

191ooo25

stock outstanding was80,00ofr

Calculate eamings per share and rcturll on common stockhldersequity for2o14and2o13E14 16 This nnanciaIinformation is avaab1e for inger Colporation.

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W% $241,000.rPJsr%cosComputc the camings per share ofc

I1 Illon stock undcr thc foong indcpendcnt sua-jons.(Round to two deomals.)

:iFchaIlgeas not declared The prcferred stock is cumu-1ative.I/Ii11vd held1o,ooo sharcs of common treasury stock throughout the year

P141^onJalltlaw1,2o14,GeKyCovorationhaddlefoningstockholdersequy accottllts,Commn Stock($2o par va1uc,6o,ooo shares issucd and

outstanding)Paid~in Capitalin Excess of Par_Common stockRetained Eanings

During the yea1the fo11oving transactions occucd,Feb. 1 Declared a$1cash dividend per sharc to stoCkholdcrs of recordn Fcbruary15`

payable A/Iarch1~a 1 Paid the dividend dec1ared in Fcbruary

Apr 1 Announced a2~fo1stock spht.Prior to the spht,the Inarket price pcr sharcwas$36

JuIy 1 Dcc1ared a10%stock dividend to stCkholdcrs of rccord on July15,diobutab1e July31 on July1,the market pcefthe stck was$13pcrsharc

31 Issucd the shares for thc stck dividendDec 1 DeClared a$050pcr sharc ddcnd tstockho1ders of recrd on Deccmber15,

payab1e January5,201531 Determined that nctincomc for the year was$350,000.

IposrrBdco9s(a)Journahzc the transactions and the closing entries for netincome and diidends.(b)Enter the beginning balances,and postthe entries to the stockho1derscq11ity accounts

or open additional stockholderscquity accounts as necdcd)(c) Prepare a stockho1derscquy scction at December31

P 42A The stockhlder equity accounts of Kalp Company at January1,2014,are asrollws

Probemsset A 583

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(c)Totastckhlderseq uity$2`224`000

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(c)Ending baa nce$566`000(d)TOtastckholdersequity

$2`898,000

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Prefelled Stock,6%,$5o parColllrnon Stock,$5parPaid~in Capitalin Exccss of Par_Prefcrred StckPaidn Capita1in Excess of Par~Cn1Inon StockRetained Earnings

$600,000800,000200,000300,000800,000

There wcre no dividends in aearsn prefcrred stock.During2014,the company had thefo11owing transactions and cvents.

July 1Aug. 1

Declared a$060cash dividend per share on common stck,Discovered$25,000understatemcntf2013dcpreciation on equipmcnt(Ignore incomc taxes.)

Sept. 1 Paid the cash dividend dcclarcd on Ju1y1,Dec. 1 Dec1ared a159stock dividend on con11tlon stock whcn the rnarket pricc ofthe

stock was$18per sha15 Declarcd a69cash dividendn preferrcd stock payable January15,201531 Dctermincd that netincome for thc year was$355,00031 Recognized$200,000rcstricuonf retaincd earnngs for p1ant expansion

rmsrrcposfa) Journahze the transactions`events,and c1sing entrics for net income and dividendsb)Entcr the beginning balanccs in the aCcounts,and post to the stockholdersequity

accounts.Nor open addiuonal stckholdcrscquy accounts as nceded)lc) Prcparc a retained carnings statcment for thc yearld)Prepare a stckholdersequity section at December31,2014

P143A The post~c1osing trial balance of Storey Crporation at Dcoember31,2014,:ontains thc f11oving stockholdersequity accounts.

Preferred stck(15,000shares issued)Common Stock(25o,000shares issued)Paid~in Capitalin Exccss of Par_Preferred stockPaidn Capa1in Exccss of Par~Con1Jlon StockCounn stock Dividends DistributableRetained Eanngs

revicv of the accounting rccords reveals the fo11oving,1.No eltors haVc been rnade ih recrding2o14transactions or in preparing the closing

enty fr netincme,2,Prefcrred stock is$50pa6%,and cumulative;15,000shares havc been outstanding

since January1,2013

$ 750,0002,500`000250,000400,000250,000

1,042 000

584 4crporations

(c)Ttastockhdersequity$5 192`000

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(d)Total stockholdersequity$2`218250

P'p@r/ze sroco/rlegrlfsecrjo,

`

cr,zgV / 0zrsVe,zrs

(LO1`2`3)`AP

Total stockholdersequity$2`770`000

DividendsJ Retained EarningsJ and Income Reporting

3.Authorized stock is20,ooo sharesf prefcrred,5o0,000sharcsf conunonoth a$10par value

4.The Janualr1ba1ancc in Retained Earnings ` as$1,170,0005. On July1,2o,oo0shares of cOIlntllon stock were issued for cash at$16per share6.On Septcmber1,the company discovcred an undcrstatcment cor of$90,000in c

puting dcpreciation in2013,The nctf tax effcct of$63,000vas propcrly dcbiteddirecdy to Retained Earnings.

7. A cash dividend of$250000was dcclared and propcdy a11ocated to prefcrred andCoHnon stock on Octobcr1,No dividendsverc paid to prcfcrred stockho1ders in2013.

8. On Dccember31,aI093common stck dividcnd x/vas declared out of rctaincd earn-ings on commn stock whcn the market price pcr share was$16,

9.Netincome for thc ycar was$585,00010.On Dccembcr31,2014,the drcctors authorized disclosure of a$200,000rcstriction of

rctaincd earnings fr plant expansion (Usc Note X)

r9sr'JtcoPrs(a) Rcproduce the Rctained Earnings aCCount(T-account)for2o14.(b)Prcpare a retaincd eamings statcment for2014.(c) Prcpare a stockholdersequity section at Deccmber31,2014.(d)Compute the a11ocation ofthe cash dividcnd to prefcrred and c11non stock.

P144A On Janua 1, 2014, n Colporation had thc f11oving stockholdersequitvaccounts.

Co11non stock(no par va1ue,90,oo0sharcs issucd and outstanding) $1,600,000Rctained Earnings 500,000

During thc year,the fo11ng transactions occurred.Fcb 1 Dec1ared a$1cash dividcnd per sharc tO stoCkholders of record on FebrualxJ

15,payable Narch1.rvar 1 Paid thc dividcnd declared in Februa91Apr 1 Announced a3fo1stock spht,Prior to the spht,the1narket price pcr share

was$36.July 1 Dec1ared a59stock dividend tO stoCkholders of record on July15,distributable

::iIIl; leckaiI1f1; rC dividend to stCkholders of record on Deccmbcr15,Determhed thnct hcme for the year was$350000.

31Dec 1

31

r,sr,,comsPrcpare the stockhlderscquity scction ofthc balance shect at(a)Narch31(b)June30(c)scptember30,and(d)Dccembcr31,2o14.

p4 5A On JanualhJ 1,2014,she1lcnburger Inc,had the fo11oxving stockholdersequityaccount baIances.

Common stock,no-par value(500,000shares issucd)CoHnon Stock Dividends DistributableRctaincd Earnings

During2014,thc fo11ving transactions and cvcnts occurred.1.Issued50,000sharcs of co11nn stock as a result of a10%stock dividend declared on

Dccembcr15,2o13.2. Issued30,000sharcs of cmmn stock for cash at$6per share.3. Coectcd an crror that had understatcd the netincomc for2o12by$70,0004.Dec1ared and paid a cash dividend of$8o,000.5.Earned nctincome of$300,000,

r9IscP,sPrcpare the stockholdersequity section ofthc balance sheet at Deccmber312014.

$1,500,000200,000600,000

Broadening YOur Perspective 587

Ethics Ca$e

tive qualterly cash dividcnds(15years).Thc last

c,s

f wh

1j1F:1w::; :;Jpa Efnsc,Is

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J:i%aJn,gohttp://aaahq0rg/AP Login.cfm tolg in and prepare responscs ttJa)Whatis the stck dividendPUH B

km dditinal sharcs quahs,as a stck dividend,asopposed ta stck sr

Answers to Chapter QuestioflsAnsWers tInsight and Accunting Across the Organizatin Questionsp.565up,DowIl,andPP Q:Vhat hols must managemcnt considcrn deciding how1arge a ::I)ii

led ca1necds,the companyovth oppoltunities,an( 1ccmpanyvi11be ablc tsustain bascd uponu,expccted future earnings,

P569A No tosophy o Whyd

:T;;:Ir:fj;tFrett prcfcrs to attract shareholders whv1FnakeJppscd ttradcrs`h

vl only hold their inveslllcnt for a shrt pcod oftimc Hc behcvcs thata high stck price discouragcs shrt~term investmcnt,

Answers tseIfTest Questions1.a 2c 3c 4a$80,00o_[(3,o0079 $100) 2] 5 d(100,00o10% $30) 6 d 7cbdmb"0000:JP = 20 6L2o0oo+0oo2=sl,400,00o; ($I26,0oo d ($176,00o ~ $66`000 - $2o000) 30%13.b 14d 15b($490,00o 1o0,ooo)

562 4CorporationsDividendsf Retained Earnings`and lncome Reporting

Prepare the entries forcash divdends and stockdivIdends,

A dividend is a corporationd bution of cash or stock to ns stckholderson a pro rata(propoLional to owIlershp)basisPrO rata Ineans that if youovn10qa ofthe conon shales,you xN,1receive10q3of the dividend.Dividendscan t1e four fonmscash,prOpe,scrip(a prossonote to pay cash),orstockCash diidends predo1inate in practice.A1so,companies declare stoCkdMdends wisomc fequency.These tforms of dhidends are the focus ofdiscussion in this chapte

Investors are veinterested in a company1s dividcnd praGticesIn thcnan-0al pres,dends are generaIy repoed quartedy as a dollar amount pershare.(somejmes they ale repoed On an annual basis)For examp1e`bkequar0edy didende in the fouh quaer of2011was36celts per shareThcdidend rate for the fouIth quaer of2011for GEvas15cents,andor ConAgraFoods1tvas24cents

Cash DivIdendsA cash diidend is a pro rata disbution of cash to stockholdersCash divi-dends are not paid onreasut5 sharesFor a cooration tO pay a cash dividcnd,it must have the fo11owing.

1. Retned earingsThelegahty of a cash dividend depends on thelaws ofthestate invhich the company is incorpOratedPayment ocash dividends f1omretained earnings is1ega1in a11statcsIn genera1,cash dividend distributiOnsf1om olly the balance in commonock llega1capitd)are i11egd.

A diidend declFed out of paid-in capitl is tellled a liquidating didendsuch a diidend reduces orhquidate

the amount ogina11y paid in by stock-ho1ders.statutes vaconsiderab1yvtll respect to cash diidends based on paid-in capd in excess of par or stated va1ueMany states penit such dividends

2.Adequate cashThe1egahty Of a dividend and the abi1ity to pay a dividendare tvo diffcrent thingsFor examp1e,ke`vith retained earnings of over$5.8bi11ion,cou1d1ega11y dec1are a dividend of at1east$5.8bi1honBut Nkecash ba1ance is on1y$1.9bi1hon

Before dec1aring a cash dividcnd,a companyboard of directors mustcarefttlly consider both curent and ftlture demands On the company1cashresourcesIn some cases,Cuent1iabities may make a cash dividend inap-prOpriate.In Other cases,a rnor p1ant cxpansiOn program may warrant onlya re1ative1ysma1l dividend

3. Declared ddendsA company does not pay dividends un1ess its board ofdirectors decides to do so,at which point the boarddec1arcs

the diVidend,The board of directOrs has fu11authority to deter1ine the amount ofincometo distribute in the for1of a dividend and the amount tO retain in the busi-nessDiVidends do not accrue like interest on a note payab1e,and they are nota1iability unti1declared.

The amount and thning of a dividend are importantissues for rnanagementto consideI1The payment of a1arge cash dividend cou1d lead to liquidity prob-1cms fOrthe company on the Other hand,asma11dividend or a Iuissed dividendmay cause unhappiness among stockholders.Iany stockholders expectto receivea reasonab1e cash paymentfIolll the Company on a periodic basislN/Iany cOmpa-nies dec1are and pay cah dividends quarte1ly on the other hand,a number ofhigh-growth companies pay no dividends,preferring tO cOnserve cash to financeftIture capital expendituies

DivIdends 563ENs FoCsoV DsThree dates are impoantin connectioJfiI:l:t::?:%111{:l1s;J1;js:

l1IJllIr;::ke accunting entries on the dec1aration

on the decIaration date,the board of directors forma11y declares(autho-HZes)the cash dividend and announces it to stockho1ders.The decIaration of a

E l

To i11ustrate`assume that on December1,2o14,the directors of Media Gen~

r:: d::liIr

Dec1

Dec,22 I

Jan 2o

DecIaration DateCash Didends

Dividends Payab1e(To rccord declaration of cash diidend)

Record DateNo ent l

50 00o50,0oo

I

payments to thepayment of thethe entI on that

= +-50`000Div

+50`000Cash FIwsno crfcctledia General debits the account Cash Dividends. Cash dividends decrease1:rljFI:l::Il:i:mpany transfers the balance of that

;sy:;;j1: l;;:;;%B :iDration supply this information.In th(i

=`Ft::t:i1:::;e the crporationIiability recognized On the declaration date is

on the payment date,the company rnakes cash dividendockholders of record(as of December22)and records theidendIf January20is tlle paymelt date for Mea Genelal,dte1s

Pa,Inet DateDividends PayableCash

(To record paymcnt of cash dividend)

50,000 |

: ud totaI assets.I11ustratiOn14~1sun1In

iedvith dividends for Media General

= +-50,000

50,000 -5o0ooCash FIows-50,000

564 14CorpOrationsDiVidendsJ Retained Earnings`and lncome Reporting

I"ustratio"141Key dividend dates

LL||;ms o1Io;

sM T1

`Th

Payment dateThe company

issues dividend checks

??????????

??????????????????

???????????

???????????Record date

Registered sharehodersare e"gible for dividend

As explained in Chapter13,preferred stock has priOrity ovcr co1Inon stock inregard to dividends. Holders of cumulative preferred stock n1ust be pad anyunpaid prioyear dividends and their current vear1s dividend before cO1InonstOckholders receive dividends

To i11ustrateassume that at December31,2014,IBR Inchas1000shares of8%,$100par value cumulative preferred stockIt alsO has50,000shares of$10par value common stock outstandingThe dividend per share for preferred stockis$8($100par value8% .The required annual dividend for preferred stock istherefore$8,000(1,000Shares$8),At December31`2014,the directors dec1area$6`000cash dividend.In this case,the entire dividend amount goes to preferedstOckholders becausc oftheir dividend preference.The ent13 to record the decla-ration of the dividend is

Dcc31 = +

-6`000Di+6,000

Cash FIowsno cfltct

I"ustration142A"Ocating dividends tO preferredand cOmmOn stOck

Cash DivldcndsDividcnds Payable

(To record$6per share Cash dividcndto preferred stockholders)

Total dividendA11ocated to prefcrrcd stock

DvdeslIreas,204(1,oClO$2)0 5dved(,000 $8)

Remainder a11ocated to comn1on stock

6,000

$50,000

$2,0008,Cl0 10,000

$40,000

6,000

Because of the cumulative feature,dividends of$2($8 $6)per shareare in arrears on preferred stock for2014. IBR must pay these dividendsto preferred stockho1ders befOre it can pay any future dividends to comon stockholdersIl3R should disclose dividends in arrears in the financialstatements,

At December31,2015,IBR dec1ares a$50,000cash dividendThe a11ocationof the dividend to the t

^JO c1asses of stock is as fo1lOws,

= +-50`000Div

+50`000

Cash FIowsno cffcct

IfIBRpreferred stocks not cuIlulative,prefeed stockholders receive only$8,000in dividends in2015Co1Inon stockho1ders receive$42,000.

Vpf DOwn'andThe decision

`hether to pay a dividend`and how rnuch to payjis a very important management decision As the chartbelvv shws`from2002to2007 many companies substantia"y increased their dividends TotaI dividends paid by U scompanies hit record levels 0ne reason for the increase is that Congress lo/ered`from390/to15%`the tax rate paid byinvestors on dividends received`making dividends rnore attractiVe to investors

Then the financial crIsis of2008occurred As a result`in2009`804Companies cut their dividends(see chart)at thehighest rate since the s&P started co"ecting data in 1995 In2010` rnore companies started increasing their dividendsHoWeVeG ptentiaI higher taxes on dividends in the future and the possib"ity of a lowgrowth economy may sta"anysignificant increase

Payouts|Companies that changed d~ends

Firms that decreased dividend(in red)

Matt Ph|ps and Jay Mi|leGLast Years Ddend S ash Was$58B||on`l//aSrreeFuma/0anuary8`

VVhat factors rnust management considerin deCiding hol/v large a dividend to pay?(Ans

`erin Broadening Your Perspective)

2010)`p C5

stock DividendsA stoCk dividend is a pro rata(proportiOnal to ovnership)distrbution of the=IIporationovn stock to stOckholders.`

`hereas a colllpany pays cash in a cash=;idend,a company issucs shares of stock in a stock dividendA stock didendresults in a decrease in retained eamings and an increase in paidin capal

Divldends 565

The entto recOrd the declaration of the dividend is

Dcc31 Cash Div1dendsDividcnds Payable

(To rccord declaration of cash dividcnds of$10,000to preferred stock and$40,000to Conunon stock)

50,00050,000

????

??

??

?????

??????

????

???

????

??

?

566 14corporationsDividendsf Retained Earnings`and Income Reporting

Unhke a cash dividend,a stock dividend does not decrease total stockholdersequity Or tota1assets

To lustrate,assumethatyou have a293ownership interestin Cetus Inc.Thatis,yOu Ovn20of its1,000shares of common stockIf Cetus dec1ares a109b stockdividend,it wou1d issue100shares(1`000 10%3)of stockYou wOuld receivetwo shares(2% 100) Would your ownership interest changeP No,itvou1drelln at2%(221,100).You nourWn more shares ofstock,but your ownership interest has not Changed

Cetus has disbursed no cash and has assumed no liabitiesWhat,then,arethe purposes and benefits of a stock dividendP Corporations issue stock dividendsgenera11y for one or more ofthe fo11owing reasons

1. To satisstockholdersdividend expectationsvithout spending cash2. To increase the rnarketabity of the cOrpOratiOnstock.WVhen the number of

shares outstanding increases,the rnarket price per share decreases.Decreas-ing the rnarket price of the stock makes it easier fOr sma11er investors to pulchase the shares

3. To emphasize that a company has pcrmanent1y reinvested in the businessa portion of stOckholdersequity,vhich therefore is unavaab1e for cashdiv1dends.

WVhen the dividend is declared,the board of drectors deternes the size ofthe stOck dividend and the value assigned to each dividend,

Genera11y,ifthe company issues a sma stock didend(1ess than20-25%of the corporationissued stock),the value assigned to the dividend is the fairva1ue per shareThis treatInent is based on the assumption that a sma11stockdividend w1have litde effect on the rnarket price of the shares previously out-standing,Thus,many stOckholders cOnsider sma11stock dividends to be distribu-tions of earnings equaltO the rnarket price ofthc shares distributed.Ifa cOmpanyissues a Iarge stock doend(greater than20-25%D,the price assigned to thedividend is the par or stated Value,Sma11stock dividends predolllinate in prac-ticeThus,xve wl illustrate only entries fOr sma11stock dividends,

$$$To illustrate the accounting for sma11stOck dividends,assume that ed1and Coo-ration has a balance of$300,000in retained earnings,It declares a1093stOck dii-dend on its50,000shares Of$10par value common stock.The curent market priceof its stock is$15per share The number of shares to be issued is5,000(10%50,000) TherefOre,the total amount tO be debited to stock Dividends is$75,000(5,000 $15).The ent1to record the declaration ofthe stock dvidend is as follows

= +-75,000Div+50,000CS+25,000CS

stock DividcndsCollllllon stock Dividends DistributablcPaidn Capitalin Excess of Par~~Common stock

(To record declaration of10%stock dividcnd)

75,00050,00025,000

Cash Flowsno ccct Iedland debits stOck Dividends for the Inarket price of the stock issued($15

5,000),(SiInilar to Cash Dividends,Stock Dividends decrease retained earnings)edland alsO credits Co1FnOn Stock Dividends Distrbutable for the par value ofthe dividend shares($105,000)and credits Paid~n Capitalin Excess of Par~COmmOn Stock for the excess ofthe rnarket price over par($55,000)

CollIlllon Stock Dividends Distributable is a stockhldersequity account,Itis not a habity because assets wl not be used to pay the dividend.Ifthe cOmpanyprepares a balance sheet before itissues the dividend shares,it reports the distrib-utable account under paid-in capital as shown in I11ustratiOn14-3.

Paid in capitalColInon stockColnoIl stoCk dideds distbutablePaid-in capita1in exccss of parcommon stock

Tota1pad in capal

$50000050,00025,000

$575,000

DivIdends 567

I"ustration143statement presentatiOn OfcOmmOn stOCk dividendsdistributable

= +-50,000CS+50,000Cs

Cash Flowsno effect

I ustration144stOCk diVidend eeCts

WVhen Iedland issues the dividend shares, it debits Common Stock Divdends Distributable and credits ColllIon StOck,as fo11ovs

Con1Inon stock Dividends Distributab1cCommon Stock

(To rccord issuancc of5,000shares in a stock ddend)

50,00050,000

EF$0 $0Hov do stock diVidends affect stockholdersequity?They change the composition of stockhoIdersequity because they transfer to paid-in capital a portion ofretained earnings Howeve total stockhoIders equity remains the same.Stock dividends also have no effect on the par Or stated value per shareBut thenumber Of shares outstanding increasesI1lustratiOn14-4shovs these effects for.l/Iedland Corporation

StockholdersequityPaid in capital

Collllllon stock$10parPaid~in capitalin excess of par~common stock

Total paid-in capita1Rctained eamings

TotaI stockhoIdersequity

outstanding shares

Par vaIue per share

BeforeDividend

$500 000

500,000300,000

$800,00050,000

$1000

AerDivIdend

$550,00025,000

575,000225,000

$800,00055,000

$1000

h this example,total paid-in capitalincreases by$75,000(50,000shares10%s15)and retained earnings decrcases by the same amount.Notc also that tota1stockholders equity remains unchanged at $800,000. The number of shareshcleases by5,000(50,00010%).

stock sp"tsA stock spIit,hke a stock diVidend`invOlves issuance of addtional shares tostOckho1ders according to their percentage ovnership.1ovever,a stock splitresuIts in a reduction in the par or stated value per shareThe puvose Of astock spht is to increase the marketability of the stOck by lovering its marketpHce per shareThis,in turn,makes it easier for the corporation to issue addi-onal stock.

The effect of a spht on1narket price is general1y inverseIy proportional tOhe size of the sphtFOr exalllple,after a2-fo1 stock sp1it,the markct price of

568 14corpOrationsDividends`Retained EarningsJ and Income Reporting

Nike1stOck fe11f1om$111to approximately$55The lowcr market price stim-ulated market activity WVithin one yeathe stOckvas trading above$100againI11ustration14-5shovs the efFect of a4-fo1stOck spht for stockhOlders.

I ustration145Eect Of stOck spl"fOr stOckhOtders

In a stock spht,the number ofsharesincreasesin the same propoItion that paror stated Value per share decreasesFor examplein a2~fo1spht,One share of$10par value stock is exchanged fOr tx/k/o shares of$5par value stock,A stock spIitdoes not have any effect on totaI paidin capaI,retahed earnings,or totalstockholdersequit

,`But,the number Of shares outstanding increases`and par

value per share decreases.I11ustratiOn14-6shov`s these effects for Medland COrpo-ration,assung thatit sphts its50,000shares of co11non stock on a2-f1basis,

lustraon146stOCk sp"t effects

I"ustration147DiefenCes between theeeCts Of stOck sp"ts and stOckdiVIdends

stockholdersequityPaid~in capitalConunon stockPaidin capital in cxccss of par_common stock

Total paid~in capitalRetained earnings

Total stockh1dersequity

outstaladng shares

Par vaIue per share

Beforestock sp"t

$500,000-0_

500,000300,000

$80000050,000

Afterstock sp"t

$500,000-0_

500,000300,000

$800,000100,000

$5.00$1000

A stOck spht does not affcct the balances in any stockho1dersequity accounts.Therefore,itis not necessary to joumaze a stock spt.

Il1ustration14-7su1Inarizes the differences betveen stock sphts and stockdiv1dends.

Item stock sp"tstock DividendTotal paid~in capitalTotal retained earningsTotal par va1ue(Commn stock)Par value per shareTotal stockho1dersequity

No changeNo changeNo changcDecreascNo changc

IncrcaseDccrcaseIncrcascNo changcNo changc

Before stock sp"t

Nunnber of shares owned increases,butercentage of coany owned remains the same

/ owned40 `shares before and l own160shares now,but l stl

oWn only l/4of the

Retained Earnings 569

T'arren Bu

etts companyj Berkshire Hathawayj has tvo cIasses of shares Unt"recentlyj the company had never sp"t either class of stock,As a resultj the class A stock had a market price of$97`000and the class B sold for about$3`200persare Because the price per share is so high`the stock does not trade as frequently as the stock of other companies3uffett has ah

`ays opposed stock sp"ts because he feels that a lol/ver stoCk price attracts short-term investors He appears=o be correct For examplewhe more than6m""on shares oflBM are exchanged on the average dayj onIy aboutJO00E!ass A shares of Berkshire are traded Despite Buffetts aversion to sp"ts`in order to accomp"sh a recent acquisition3erkshire decided to sp"t its class B shares50to1

SCott Patterson`Berkshire Nears Sma er Baby B`

/t/a//SeeFJouma/Onll/,e lJanuary19`2010)

`hy does Warren Bu

ett usua"y oppose stock spts?(Ansvverin Broadening Your Perspective)

As you1earned in Chapter13,retained earnings is netincome that a companyretains in the businessThe balance in retained earnings is part of the stOck-

=oldersclaiIn on the total assets Of the corpOratiOnIt does not,though,repre-

knt a claiIn On any speciflc asset,Nor can the amount of retaincd earnings besOciated with the ba1ance Of any asset accountFor example,a$100,000=alance in retained earnings dOes not rnean that there should be$100,000in=hThe reason is thatthe company rnay have used the cash resu1ting f1om the:cess of revenues Over eXpenses to purchase budings,equipment,and other ets.

To dcmonstrate that retained earnings and cash rnay be quite different,Il1us-

=ation 14-8shoxA/s recent amounts of retained earnings and cash in se1ectedIompan1es

(in mins

CompanyFacebookGooeNike`IncStarbucks CofFee CompanyAmazon.com

RetainedEarnings

Rememberom Chapter13thatvhen a company has netincome,it closestincome to retained earnings,The closing entl is a debitto Income Su1Inaryd a credit to Retained Earnings.

hen a cOmpany has a netloss(expenses exceed revenues),it alsO closes thismount to retained earningsThe c1osing eny in this case is a debit to RetainedLaings and a credit to Income sulllllla91This is done even if it resu1ts in a

2

Identfy the itemsreported in a retainedearnings statement,

I"ustration148Retained earnings and cashbalances

Cash$ 1,60620,0824,8852 189(1,375)

$ 1,51210`1981,855281

2,539

570 4CorporationsDividendRetained Earningsand lncome Reporting

debit balance in Retained EarningsCompaes do not debit net losses topaidin capaI accountsTo do so wou1d destroy the distinction betveen paid-in and earned capita1.If cullulative1osses exceed cunnulatiVe income over a com-pany1s 1ife, a debit ba1ance in Retained Earnings resu1ts A debit balance inRetained Eamings is identified as a deficit.A company repol-ts a deficit as adeduction in the stockholder equity section,as shovn in I11ustrajon149.

I"ustratiom149stOCkhOldersequity w"h dec"

BaIance sheet(partiaI)stock/lolder equity

Paidn capita1Con1rnon stock

Retined egs(dencit)Tota1stockho1der equity

Retained Earnings RestrictonsThe ba1ance in retained earnings is genera11y avai1able for dividend dec1arajons.some companies state this factFor example, Lockheed Iardn Cokporationstates the fo11oving in the notcs to its financial statements

I"ustration1410DisClOsure Of unrestricted

retained earnIngs

At Deccmbcr 31, retaned ealllings wcrc unrestcted and availabIe for dhidendpayments

In some cases,there may be retained earnings restrictions.These make aportioh of the retained earnings balance cuIrently unavaab1e for dividends,Restrictions result IiOnOne or rnore ofthe fo11oving causes.

1. Legal restrictions~hdany states require a corpOration to restrict retainedearnings for the cost Of treasur`stock purchased.The restrictiOn keepsintact the corporatiOns1ega1capital that is being temporarily he1d as trea-sury stock.Vhen the company se11s the treasury stOck,the restriction ishfted

2. Contractual restctions Longterm debt contracts may restrict retainedearnings as a condition for the loan.The restriction hn1its the use of colporateassets for payment of dividcnds.Thus,itincreases the hkehhoOd that the coporation will be able tO Ineet required1Oan payments.

3.Voluntary restnctionsThe board of directors may voluntary create re-tained earnings restrictions for specific purposesFor examp1e,the board rnayauthorize a rcstriction for future p1ant expansionBy reducing the amount orctaincd earnings avaable for dividends, the company makes mOre cashavaab1e for the planned expansion

Companies genera11y disc1ose retained earnings restrictions in the notesto the financial statements.For examp1e,as shown in I11ustration 14-11`Tektronix Inc.,a rllanufaCturer of electrOnic measurement devices,had totalretained earnings of$774Ini1hon,but the unrestricted portiOnvas on1y$223.8mi1hon.

$800,000(50,000)

$750,000

Retained Earnings 571

I"ustration14~11Disc1osur0f restrictiOn

:f Wr f;:The Cmnnh0/J,. ^^The cmpany had unned iiTg&=l`

thosc req1ircments,

:: f mcome d a pOr yea:: ;ynaccounts and report it in tlThe correctiOn of an error in previously issued financial statements is kn0

vn : :Fctdndy )w in this account.The net : T F

dhKlled ugh

iI:llI: n eqpme h2O13by

11foverstated both net incon(:fTk entf1 tle por peod attmenmRctaincd EarningsACCunulatcd Deprcciatin-~Equipment

(To aust fr undestatcment of deprcciinin aprir period)

A debit to an income statement account in2o14is incorrect because the errorDertains to a prior yea

300,0oo = +

-300,ooo RE-300 ooo300,oooCash FIwsno cfftct

I""stratio14~12statement presentatiOn Ofp"or pe"od adlustments

1 -11

l total223 s

Again,repOrting the corectionJlCorrect because it apphes to a

: ;Balance,Janu1,as aucd

$ 800`00o

(300,00Cl)

$ 500,0oo

::mellt woA compIete retaincd carnings statcment is sho

vn in Iustratin14~14n thc ncxt page

be

572 4CorporationsDividends`Retained EarningsJ and Income Reporting

Retained Earnings statementThe retained earnings statement shOws the changes in retained earnings duling the yeaThe company prepares the statement f1onthe Retained Earningsaccount,I1lustration14-13shovs(in T-account forrll)transactiOns that affectretained earnings

I ustration1413Debits and credits toretained eafnings

As1ndicated,net incomencreases retained earnings,and a nct1oss decreasesrctained earnings. Prior period austInents may either increase or decreaseretained earningsBoth cash dividends and stock dividends decrease retaincdearningsThe circumstances under`svvhich treasury stock transactions decreaseretained earnings are exp1ained in Chapter13,page623

A complete retained earnings statement for Graber Inc.,based on assumeddata,is as fO11ovs,

1. Nct loss2.Prior perod austmcnts for

overstatemcnt of net income3. Cash dividends and stock dividcnds4 Some disposa1s of tresury stock

Ba1ancc,January1,as rcportedCorrcction for understatcment of net income

in prior period(invento1y error)

Balancc,Janu1,as austedAdd:Nctincome

LcssCash div1dendsstock dividcnds

Balance,December31

1 Netincomc2 Prior pcliod auStmcnts for

undcrstatement of nctincome

I ustratio"1414Retained earningsstatement

$100,000200,000

$1,050,000

50,0001,100`000360,000

1,460,000

300,000$1,160,000

Retained Earnings

Prepare and anaIyze acomprehensivestockhoIdersf equitysection.

PresentationI11ustration14-15presents the stockho1dersequity section of Graber Incbaance sheetNote the fo11oving,(1)Co1Inon stock dividends distributablei:shovn underCapital stock,inPaid-in capita1(2)A note(Note R)discloses aretained earnings restriction

Instead of presenting a detaed stockholdersequity section in the balancesheet and a retained earnings statement,many companies prepare a stocldo1derequity statelentThis statment shoWs the changes(1)in each stockholder.equity account and(2)in tota1that occured during the yeaAn eXample ofa stock-ho1dersequity statement appears in Appleflnancia1statements in Appendix A

statement Presentation and Ana|ysis 573

I"ustration1415COmprehensive stOckhOldersequ"y seCtiOn

stockho1dersequityPaidn capital

Capital stock9%Pferedock,$100par value,cumu1he,

ca11ab1e at$120,10,000sharcs authorized,6,000shares issued and outstanding

Common stock,no pa$5stated value,500,000sharcs authorizcd,400,000sharesissued and390,000sharcs outstanding

Conlnon stock didends dstributableTota1capita1stock

Additiona1paid~in capitalIn cxcess of par~prefeed stckIn cxccss of statcd Va1ue-common stock

Tota1additiona1paid-in capita1Total paid-in capital

Rctaincd carnings(see Note R)Tota1paid-in capitaI and retained earningsLcssTreasulr stock(10,000common shares)

$ 600,000

$2,000,00050,000 2,050,000

2,650,000

30,0001,050,000

1,080,0003,730,0001,160,0004,890,000

80,000Tota1stockholderscquity $4,810,000

ote Retained earnings is restricted for tuIe cst oftreasury stock,$80,000,

nalysisestors and analysts can measure profitabity f1o1 the vievpoint of thernon stockho1der by the return on common stockhoIders equityThiso,as shovn in I11ustration14-16,indicates hoxx/rnany do1lars of nct incomee company earned for each do11ar invested by the common stockholdersIt isuputed by dividing net income avaiIable to common stockholders(vhichnetincome rninus preferred stock dividends)by average co1rnon stockholders:=ultv

To i11ustrate,WValt Disney Companybeginningoithe-year and end-o:the-i:r counon stOckholdersequity`ere$31,820and$30,753rnilhon,respectiVely1 netincome was$4,6871i11ion,and nO preferred stock was outstanding,TheTrn on common stOckholdersequity is computed as fo11ows.

NetlncomemInus

Preferred Dividends

($4,687 $0)

Average Common stoCkhoIders'Equity

($31,820+$30,753)2

Return on Common stoCkhoders'Equity

15.0%

lustration1416Retum On cOmmOnstOCkhOldersequ"yand cOmputaon

As shOvn above` if a company has preferred stock,ve^JOu1d deduct theount of preferred dividends f1ollI the companynet income to cOmputeRcome available tO cOmmon stockhOldersAlsO`the par value of preferred stock$deducted fontota1stockholdersequityvhen computing the average co1-{n stockholdersequity

574 4C0rporationsDividendsJ Retained Earnings and lncome Reporting

4

Describe th0form andcontent of corporationincome statements.

Income statement PresentationIncome statements for corporations are the salne as the statements for propetorshVs or panershs except for one thg the reporthg ofincOIle taXes.Forin0ometaX pulposes`coorations are a separate legal entity As a resu1t,colpO-rations repo1income tax expense in a separate section ofthe corporation incomestatement,bcfore net income.The condensed income statement for Leads IncinI11ustration14-17shovs a1pica1presentationNote that the cOrporation repo1tsincome before income taxes as one1ine ite1and income tax expense as anotheE

lustratio14 17lncOme statement w"hincOme taxes

sa1es revenueCost of goods soldGross prontopcrating expensesIncomc f1on1operationsothcr revenues and gainsother expenses and losscsIcome before income taXesIncome tax expenseNetincomc

$800`000600`000200,00050,000

150,00010,000(4,000)

156,00046,800

$109,200

Companies record income tax expense and the related liabi1ity forincometax1spayable as palt ofthe auing prcess,Using the da fOr Leads Inc,in 1usaonI4-17,the austing entry for income tax penseDecember31`14`is

= +-46`800Exp

+46,800Cash FloWsno cfcct

5

Compute earnings pershare.

Incomc Tax ExpenseIncome Taxes Payab1c

(To record incomc taXcs for2014)

46,80046,800

The income statement of Apple(in Appendix A)presents another illustratioOfincome taxes

lncome statement AnaIysisThe financial press flequently repoIts earnings data.stOckholders and poteninvestorsvidely use these data in evaluating the prostabity of a company AcOnvenient rneasure of earnings is earnings per share(EPs),vhich indicaIfthe netincome earned by each share of outstanding common stock.

SA DP E o$The existence of preferred dividends shghtly comphcates the calculatiOnEPS.When a corpOration has both preferred and common stock,`s`ve rnust sutract the current yearpreferred dividend from netncome,to arrive at incOIn=availab1e to common stockholdersI11ustration14-18shovs the formula lmcompujng EPs

To i11ustrate,assume that Ra11y Increports net income of$211,000on102,500vcightedaverage common shares,2During the yeait also declar

2Thc calculation ofthe xkeighted average of common shares outstanding is discussed in advanceaccounting courses

Net InC0memInus

Preferred Dividends

summary of Leaming0eCtives 575

I"ustration1418FOrmula fOr earnings pr shareWei9htedAverage

Con1mon shares Outstanding

Earningsper

share J

::: ; :: s:: t :iidend for the cuent yeavhether or notit is declaredRemember that co:anies report earnings per share on1y for conon stock.

i )e1ov net income On the statement.FOrjy Inc,the presentation is as fo11ovs.

I"ustration1419BasIc earnIngs per sharedisc1osure

NctinComeEarnings per share

$211,000

$2oo

F:{lll::( :;:Cnt date At the dec1aratio date,thc entrics are

=h dividcnd~debit Cash Dividends and credit Divi-

:ntnes for cash and stock dividends arecash didend~cbit Dividcnds Payab1c and credit Cash;sma11stockidcnd_dcbit Collllllon Stock Dividends Distribut-;olc and crcdit Co1Inon stock.

1:

isposals of trcasuy stock

Ihratlofthc rnarkct price pcr sharc to the carnings per sharc is called the price/earnings(P`E)-o Thcnancia11ncdia report this ratio for common stoCkS hstcd on laalor stock eXchanges

sTrTsecun includcs all stockholdcr equy accounts It con-sists ofbx/o sectionspaid-in capitil and retaincd earnings

It shou1d also indudc notes to thc nnancia1statcments

4: incme

statememts.Thcfom and contentofcorporatinincomestatemcnts arc silllilar to thc statements of proprietoships and mipStll olc cxCCptioCoVFolsmustrcpo1tincomc taxcs orincome tax cxpcnse1n a sep-arate seCtion beforc netincome in the inco1ne statement.

to ca1cu1ate EPs.

IMGIMG