Weygandt AP 10e PowerPoint Ch14

7/28/2019 Weygandt AP 10e PowerPoint Ch14

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14-1

Distribution of cash or stock to stockholders on a prorata (proportional) basis.

Types of Dividends:

SO 1 Prepare the entr ies for cash div idends and stoc k div idends.

1. Cash dividends.

2. Property dividends.

Dividends expressed: (1) as a percentage of the par orstated value, or (2) as a dollar amount per share.

3. Stock dividends.

4. Scrip.

Dividends


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Three dates:


Dividends


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14-3

For a corporation to pay a cash dividend, it must have:

1. Retained earnings - Payment of cash dividends from

retained earnings is legal in all states.

2. Adequate cash.

3. A declaration of dividends by the Board of Directors.


Dividends

Cash Div idends


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Illustration: On Dec. 1, the directors of Media General declare a

50 per share cash dividend on 100,000 shares of $10 par value

common stock. The dividend is payable on Jan. 20 to

shareholders of record on Dec. 22?

December 1 (Declaration Date)

Cash dividends 50,000

Dividends payable 50,000

December 22 (Date of Record)

January 20 (Payment Date)



Cash 50,000

No entry

Dividends


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14-5

Allocating Cash Dividends Between Preferredand Common Stock


Holders ofcumulative preferred stock must be paid

any unpaid prior-year dividends before commonstockholders receive dividends.

Dividends


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14-6 SO 1 Prepare the entr ies for cash div idends and stoc k div idends.

Illustration: On December 31, 2012, IBR Inc. has 1,000 sharesof 8%, $100 par value cumulative preferred stock. It also has

50,000 shares of $10 par value common stock outstanding. At

December 31, 2012, the directors declare a $6,000 cash dividend.

Prepare the entry to record the declaration of the dividend.



Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000

Dividends


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2012 2013

Dividends declared 6,000$Dividends in arrears

Allocation to preferred 6,000

Remainder to common -$

* 1,000 shares x $100 par x 8% = $8,000

*

** 2012 Pfd. dividends $8,000 declared $6,000 = $2,000

**

Illustration: At December 31, 2013, IBR declares a $50,000cash dividend. Show the allocation of dividends to each class of

stock.

$ 50,0002,000

8,000

$ 40,000

Dividends


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Illustration: At December 31, 2013, IBR declares a $50,000 cashdividend. Prepare the entry to record the declaration of the

dividend.

Dividends


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14-9

Pro rata distribution of the corporations own stock.


Results in decrease in retained earnings and increase in paid-in capital.

Illustration 14-3

Dividends

Stock Div idends


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14-10

Reasons why corporations issue stock dividends:

1. Satisfy stockholders dividend expectations without

spending cash.

2. Increase marketability of the corporations stock.

3. Emphasize a portion of stockholders equity has been

permanently reinvested in the business.


Dividends

Stock Div idends


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14-11

Small stock dividend(less than 2025% of the

corporations issued stock, recorded at fair market

value)

Large stock dividend(greater than 2025% of issued

stock, recorded at par value)


* Accounting based on the assumption that a small stock dividend will

have little effect on the market price of the outstanding shares.

*

Dividends

Stock Div idends


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14-12

10% stock dividend is declared

Stock dividends (5,000 x 10% x $40) 20,000

Common stock dividends distributable 500

Paid-in capital in excess of par value 19,500

Stock issued


Common stock (5,000 x 10% x $1) 500

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


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14-13

Stockholders' equityPaid-in capital

Common stock, $1 par, 5,000 issuedand outstanding 5,000$


Paid-in capital in excess of par 64,500

Retained earnings 90,000Total stockholders' equity 160,000$

HH Inc.

Balance Sheet (partial)

Stockholders Equity with DividendsDistributable


Dividends


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14-14

HH Inc. Before After Net

Dividend Dividend Change

Stockholders' equity

Paid-in capitalCommon stock, $1 par, 5,000 issued

and outstanding 5,000$ 5,500$ 500$

Paid-in capital in excess of par 45,000 64,500 19,500

Retained earnings 110,000 90,000 (20,000)

Total stockholders' equity 160,000$ 160,000$

Outstanding shares 5,000 5,500

Book value per share 32$ 29$


Effects of Stock Dividends

$ 0

Dividends


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14-15

Which of the following statements about small stock dividends

is true?

a. A debit to Stock Dividends for the par value of the shares

issued should be made.

b. A small stock dividend decreases total stockholders

equity.

c. Market value per share should be assigned to the

dividend shares.

d. A small stock dividend ordinarily will have no effect on

book value per share of stock.

Question


Dividends


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14-16

In the stockholders equity section, Common Stock

Dividends Distributable is reported as a(n):

a. deduction from total paid-in capital and retainedearnings.

b. current liability.

c. deduction from retained earnings.

d. addition to capital stock.


Dividends

Question


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Dividends

Reduces the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number of shares.

Stock Spl i t


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2 for 1 Stock SplitNo Entry -- Disclosure that par is now $.50 and shares

outstanding are 10,000.

Illustration: HH Inc. has 5,000 shares issued andoutstanding. The per share par value is $1, book value

$32 and market value is $40.


Dividends


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14-19

HH Inc. Before After Net

Split Split Change

Stockholders' equity

Paid-in capitalCommon stock 5,000$ 5,000$ -$

Paid-in capital in excess of par 45,000 45,000 -

Retained earnings 110,000 110,000 -

Total stockholders' equity 160,000$ 160,000$ -$

Outstanding shares 5,000 10,000Book value per share 32$ 16$


Effects of Stock Splits

Dividends


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14-20

Net income increases Retained Earnings and a netloss decreases Retained Earnings.

Part of the stockholders claim on the total assets of

the corporation.

Debit balance in Retained Earnings is identified as a

deficit.

SO 2 Identi fy the items repo rted in a retained earning s statement.

Retained Earnings

Illustration 14-9


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Restrictions can result from:

1. Legal restrictions.

2. Contractual restrictions.

3. Voluntary restrictions.


Companies generally disclose retained earnings restrictions inthe notes to the financial statements.

Retained Earn ings Restr ic t ions

Retained Earnings


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14-22

Correction of an errorin previously issued financial

statements.

Result from: mathematical mistakes.

mistakes in application of accounting principles.

oversight or misuse of facts.

Adjustment made to the beginning balance of retained

earnings.


Prior Per iod Adjustments

Retained Earnings


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14-23

Balance, January 1 1,050,000$

Net income 360,000Dividends (300,000)

Balance, December 31 1,110,000$

For the Year Ended December 31, 2012

Statement of Retained EarningsWoods, Inc.

Before issuing the report for the year ended December 31, 2012, you discover a

$50,000 error (net of tax) that caused the 2011 inventory to be overstated(overstated inventory caused COGS to be lower and thus net income to be higher in

2011. Would this discovery have any impact on the reporting of the Statement of

Retained Earnings for 2012?


Retained Earnings Statement


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Balance, January 1, as previously reported 1,050,000$

Prior period adjustment - error correction (50,000)Balance, January 1, as restated 1,000,000

Net income 360,000

Dividends (300,000)

Balance, December 31 1,060,000$

For the Year Ended December 31, 2012

Statement of Retained EarningsWoods, Inc.




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14-25 SO 2 Identi fy the items repo rted in a retained earning s statement.

Debits and Credits to Retained Earnings

Illustration 14-13



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14-26

All but one of the following is reported in a retained

earnings statement. The exception is:

a. cash and stock dividends.

b. net income and net loss.

c. some disposals of treasury stock below cost.

d. sales of treasury stock above cost.

Question




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14-27 SO 3

Illustration 14-15

Statement Presentation and Analysis

Stockholders Equity

Presentat ion


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14-28

Net Income Available toCommon Stockholders

Return onCommon

StockholdersEquity

=Average Common

Stockholders Equity

SO 3 Prepare and analyze a comp rehensive stockho lders equi ty sect ion.

Ratio shows how many dollars of net income the company

earned for each dollar invested by the stockholders.


StockholdersEqu i ty Analys is


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14-29

IncomeStatement

Presentat ion

SO 4 Descr ibe the form and con tent of corp orat ion income statements.

Illustration 14-17



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14-30

Income Statement Analys is

Net Income minusPreferred DividendsEarnings

Per Share = Weighted-Average CommonShares Outstanding

SO 5 Comp ute Earning s Per Share.

Ratio indicates the net income earned by each share of

outstanding common stock.



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14-31

The income statement for Nadeen, Inc. shows income

before income taxes $700,000, income tax expense

$210,000, and net income $490,000. If Nadeen has

100,000 shares of common stock outstanding throughoutthe year, earnings per share is:

a. $7.00.

b. $4.90.c. $2.10.

d. No correct answer is given.

Question

($490,000 / 100,000 = $4.90)

SO 5 Comp ute Earning s Per Share.



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14-32

Key Points

The term reserves is used in IFRS to indicate all non

contributed (nonpaid-in capital). Reserves include retained

earnings and other comprehensive income items, such as

revaluation surplus and unrealized gains or losses on available-for sale securities.

IFRS often uses terms such as retained profits or accumulated

profit or loss to describe retained earnings. The term retained

earnings is also often used.


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Key Points

The accounting related to prior period adjustment is essentially

the same under IFRS and GAAP. One area where IFRS and

GAAP differ in reporting relates to error corrections in

previously issued financial statements. While IFRS requiresrestatement with some exceptions, GAAP does not permit any

exceptions.

The stockholders equity section is essentially the same under

IFRS and GAAP. However, terminology used to describe certain

components is often different.

Equity is given various descriptions under IFRS, such as

shareholders equity, owners equity, capital and reserves, and

shareholders funds.


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14-34

Key Points The income statement using IFRS is called the statement of

comprehensive income. A statement of comprehensive income

is presented in a one- or two-statement format. The single-

statement approach includes all items of income and expense,as well as each component of other comprehensive income or

loss by its individual characteristic. In the two-statement

approach, a traditional income statement is prepared. It is then

followed by a statement of comprehensive income, which starts

with net income or loss and then adds other comprehensiveincome or loss items.

The computations related to earnings per share are essentially

the same under IFRS and GAAP.


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14-35

Looking into the Future

The IASB and the FASB are currently working on a project related

to financial statement presentation. An important part of this study

is to determine whether certain line items, subtotals, and totals

should be clearly defined and required to be displayed in the

financial statements. For example, it is likely that the statement of

stockholders equity and its presentation will be examined closely.


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14-36

The basic accounting for cash dividends and stock dividends:

a) is different under IFRS versus GAAP.

b) is the same under IFRS and GAAP.

c) differs only for the accounting for cash dividends between

GAAP and IFRS.

d) differs only for the accounting for stock dividends

between GAAP and IFRS.

IFRS Self-Test Questions


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14-37

Which item in not considered part of reserves?

a) Unrealized loss on available-for-sale investments.

b) Revaluation surplus.

c) Retained earnings.

d) Issued shares.



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14 38

Under IFRS, a statement of comprehensive income must

include:

a) accounts payable.

b) retained earnings.

c) income tax expense.

d) preference stock.


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Weygandt AP 10e PowerPoint Ch14