CHAPTER 14 Non. 14

CHAPTER 14
CORPORATIONS: DIVIDENDS, RETAINED

EARNINGS, AND INCOME REPORTING
Learning Objectives:
After studying this chapter, you should be able to:

1. Prepare the entries for cash dividends and stock
dividends.
2. Identify the items that are reported in a retained
earnings statement.
3. Prepare and analyze a comprehensive
stockholders’ equity section.
4. Describe the form and content of corporation
income statements.
5. Compute earnings per share.
Dividends
Cash dividends Stock dividends Stock splits
Cash Dividends:
 A cash dividend is a pro rata distribution of
cash to stockholders.
 For a corporation to pay a cash dividend it
must have:
(a) Retained earnings,
(b) Adequate cash, and
(a) A declaration of dividends.
Example:
On November 27, the board of directors of Henderson
Company declared a $0.40 per share dividend. The
dividend is payable to shareholders of record on
December 7 on December 24. Henderson has 25,500
shares of $1 par common stock outstanding at
November 27.
Required:
Journalize the entries needed on the declaration and
payment dates.
Date Explanation Debit Credit

Nov. Cash dividend declared 10,200
27 Cash dividend payable 10,200
( To declare cash dividend)
Dec.7 No entry required
(Date of record)
Dec. Cash dividend payable 10,200
24 Cash 10,200
(To pay cash dividend declared)
Stock Dividends
 A stock dividend is a pro rata distribution to
stockholders of the corporation’s own stock and
results in a decrease in retained earnings and an
increase in paid-in capital.
 At a minimum, the par or stated value must be
assigned to the dividend shares; in most cases,
however, fair market value is used.
 A stock dividend does not decrease Total Assets or
Total Stockholders’ equity.
Purposes and Benefits of a Stock Dividend:

Corporations issue stock dividends generally for one or
more of the following reasons:
1) To satisfy stockholders’ dividend expectations
without spending cash.
2) To increase the marketability of stock by
increasing the number of shares.
3) To emphasize that a portion of stockholders’
equity has been permanently reinvested in the
business and unavailable for cash dividends.
Stock Dividends Distinguished:
 The accounting profession distinguishes between

a SMALL stock (less than 20-25% of the
corporation’s issued stock) and a LARGE stock
dividend (greater than 20-25%).
 Directors should assign fair market value to
SMALL stock dividends based on the
assumption that a small stock dividend will
have little effect on the market price of the
shares previously outstanding.
 Par or stated value per share is normally
assigned to a LARGE stock dividend.
Example:
Assume that Amr Corporation has a balance of
$300,000 in retained earnings and declares a 10% stock
dividend on its 50,000 shares of $10 par value common
stock. The current fair value of its stock is $15 per
share.
1- Prepare the required entries for Stock dividend.
2- Calculate Book value per share before and after
stock dividend.
ANSWER:
*The number of shares to be issued
= (50,000 ×10%)
= 5,000 shares
*The amount to be debited to Retained Earnings
= (5,000 × $15)
= $75,000
Note:
 Retained Earnings is debited for the fair market
value of the stock issued because this is a
SMALL stock dividend.
 Common Stock Dividends Distributable is
credited for the par value of the dividend shares
(5,000 × $10), and the excess is credited to Paid-
in capital.
Date Account Titles and Explanation Debit Credit

Stock Dividend/Retained Earnings 75,000
Stock Dividends Distributable 50,000
Paid-in capital in Excess of par
Value- common
(To declare a 10% stock dividend)
25,000
Date Account Titles and Explanation Debit Credit

Stock Dividends Distributable 50,000
Common stock 50,000
(To Record issuance of stock dividend)
Stock Dividend Effects:

Before After
Stockholders’ Equity
dividend dividend
Paid-in Capital
Common stock, $10 par $500,000 $550,000
Paid-in capital in excess of par value - 25,000
Total paid-in capital 500,000 575,000
Retained Earnings 300,000 225,000
Total stockholders’ Equity $800,000 $800,000
÷ Outstanding shares 50,000 55,000
Book value per share $16 $14.55
Note:
Stock dividends change the composition of stockholders’
equity because a portion of retained earnings is
transferred to paid-in capital. However, total stockholders’
equity and the par or stated values per share remain the
same.

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CHAPTER 14

CORPORATIONS: DIVIDENDS, RETAINED

After studying this chapter, you should be able to:

Date Explanation Debit Credit

Purposes and Benefits of a Stock Dividend:

Stock Dividends Distinguished:

 The accounting profession distinguishes between

Date Account Titles and Explanation Debit Credit

Date Account Titles and Explanation Debit Credit

Stock Dividend Effects:

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