1) This chapter discusses dividends paid by corporations including cash dividends and stock dividends. It provides examples of journal entries to record declaration and payment of cash dividends, and declaration of stock dividends.
2) Stock dividends are distinguished from cash dividends and result in a transfer from retained earnings to paid-in capital, keeping total stockholders' equity the same.
3) The chapter provides an example of a 10% stock dividend declared by a company, including the journal entries and calculation of book value per share before and after the stock dividend.
1) This chapter discusses dividends paid by corporations including cash dividends and stock dividends. It provides examples of journal entries to record declaration and payment of cash dividends, and declaration of stock dividends.
2) Stock dividends are distinguished from cash dividends and result in a transfer from retained earnings to paid-in capital, keeping total stockholders' equity the same.
3) The chapter provides an example of a 10% stock dividend declared by a company, including the journal entries and calculation of book value per share before and after the stock dividend.
1) This chapter discusses dividends paid by corporations including cash dividends and stock dividends. It provides examples of journal entries to record declaration and payment of cash dividends, and declaration of stock dividends.
2) Stock dividends are distinguished from cash dividends and result in a transfer from retained earnings to paid-in capital, keeping total stockholders' equity the same.
3) The chapter provides an example of a 10% stock dividend declared by a company, including the journal entries and calculation of book value per share before and after the stock dividend.
1) This chapter discusses dividends paid by corporations including cash dividends and stock dividends. It provides examples of journal entries to record declaration and payment of cash dividends, and declaration of stock dividends.
2) Stock dividends are distinguished from cash dividends and result in a transfer from retained earnings to paid-in capital, keeping total stockholders' equity the same.
3) The chapter provides an example of a 10% stock dividend declared by a company, including the journal entries and calculation of book value per share before and after the stock dividend.
Download as DOC, PDF, TXT or read online from Scribd
Download as doc, pdf, or txt
You are on page 1/ 6
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.
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.
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.
