ACCT 4A(13.4-13.5)

Recording Stock Dividends

As with a cash dividend, there are three dates for a stock dividend: - Declaration date - Record date - Distribution date The declaration of a stock dividend does not create a liability because the corporation is not obligated to pay assets. (Recall that a liability is a claim on assets.) The entry to record a stock dividend depends on the size of the dividend. Generally Accepted Accounting Principles (GAAP) distinguish between small and large stock dividends in the following manner: Small stock dividend—less than 20% to 25% of issued and outstanding stock Large stock dividend—greater than 20% to 25% of issued and outstanding stock

Cumulative preferred stock

Shareholders must receive all dividends in arrears plus the current year dividends before the common stockholders receive a dividend. But a corporation reports cumulative preferred dividends in arrears in notes to the financial statements.(for them to decide whether to invest or not).

Noncumulative Preferred Stock

The corporation will not have any dividends in arrears because the corporation is not required to pay passed dividends.

Cash Dividends

These cause a decrease in both assets (Cash) and equity (Retained Earnings). - Most states prohibit using paid-in capital for dividends. Accountants, therefore, use the term legal capital to refer to the portion of stockholders' equity that cannot be used for dividends.

Stock Splits

This increases the number of issued and outstanding shares of stock. A stock split also decreases par value per share, whereas stock dividends do not affect par value per share. For example, if Greg's Games splits its common stock 2-for-1, the number of issued and outstanding shares is doubled and par value per share is cut in half. A stock split also decreases the market price per share of the stock. A 2-for-1 stock split of a $2 par stock with a $20 market value per share will result in two shares of $1 par value with approximately $10 market value per share.

Continuing Operations

This part of the business should continue from period to period. Income from continuing operations, therefore, helps investors make predictions about future earnings.

Why Issue Stock Dividends

To continue dividends but conserve cash. A company may wish to continue the distribution of dividends to keep stockholders happy but may need to keep its cash for operations. A stock dividend is a way to do so without using corporate cash. To reduce the market price per share of its stock. Depending on its size, a stock dividend may cause the company's market price per share to fall because of the increased supply of the stock. Suppose that a share of Greg's Games' stock was traded at $50 recently. Doubling the shares issued and outstanding by issuing a stock dividend would likely cause Greg's Games' stock market price per share to drop closer to $25 per share. One objective behind a stock dividend might be to make the stock less expensive and, therefore, more available and attractive to investors. To reward investors. Investors often feel like they have received something of value when they get a stock dividend.

Three Important Dates For Dividends

1. Declaration date. On the declaration date—say, May 1—the board of directors announces the intention to pay the dividend. The declaration of a cash dividend creates an obligation (liability) for the corporation. 2. Date of record (or record date). Those stockholders holding the stock at the end of business on the date of record—a week or two after declaration, say, May 15—will receive the dividend check. Date of record is the date the corporation records the stockholders that receive dividend checks. 3. Payment date. Payment of the dividend usually follows the record date by a week or two—say, May 30. Maybe I'll be able to use this knowledge for some sort of swing trading strategies for stocks!

Discontinued Operations

After continuing operations, an income statement may include gains and losses from discontinued operations. These gains and losses occur when a company sells or disposes of an identifiable division (sometimes called a segment of the business). The gain or loss on discontinued operations is reported separately from continued operations because this type of disposal does not occur frequently.

Earnings Per Share

EPS is the most widely used of all business statistics. EPS reports the amount of net income (loss) for each share of the company's outstanding common stock. Earnings per share is calculated as net income minus preferred dividends divided by the weighted average number of common shares outstanding. Preferred dividends are subtracted from net income because the preferred stockholders have the first claim to dividends. A company that reports discontinued operations must report earnings per share for discontinued operations, either on the face of the income statement (as shown in Exhibit 13-10) or in the notes to the financial statements. Earnings per share for continuing operations must be reported on the face of the income statement.

Large Stock Dividends

Large stock dividends are rare, but when they are declared, they are normally accounted for at the stock's par value instead of the stock's market value. Par value is used because the larger number of issued and outstanding shares will reduce market price per share, making market price per share an invalid measurement of the stock dividend value.

Corporate Income Statement

Look at and analyze the image. Take notice of the following three sections: - Continuing Operations - Special Items - Earnings Per Share

Distributing Day

Look at image. No cash is sent out, only shares.

Declaring And Paying Dividends(Common Stock)

On the declaration date the company DEBITS "Cash Dividend" and CREDITS "Dividends Payable." The dollar amount that you'll record is the amount you will pay per share times the number of shares you'll be paying dividends on. On the date of record no journalizing is needed. On the payment date, you simply do the following: You DEBIT "Dividends Payable" and CREDIT "Cash." Just as a side note, the account "Dividends Payable" get closed into the "Retained Earnings" account at the end of the accounting period.

Small Stock Dividends

Small stock dividends are accounted for at the stock's market value. Here is how the various accounts are affected at the date of declaration: - "Stock Dividends" is debited for the market value of the dividend shares. - "Common Stock Dividend" Distributable is credited for the dividend stock's par value. - "Paid-In Capital in Excess of Par" is credited for the excess.

Declaring And Paying Dividends(Preferred Stock)

The cash dividend rate on preferred stock is often expressed as a percentage of the preferred stock par value, such as 6%. Sometimes, however, cash dividends on preferred stock are expressed as a flat dollar amount per share, such as $3 per share. Therefore, preferred dividends are computed two ways, depending on how the preferred stock cash dividend rate is stated on the preferred stock certificate.

Stock Dividend

This is a distribution of a corporation's own stock to its stockholders. Unlike cash dividends, stock dividends do not give any of the corporation's assets, like cash, to the stockholders. - They affect only stockholders' equity accounts (including Retained Earnings, Stock Dividends, Common Stock, and Paid-In Capital in Excess of Par). - They have no effect on total stockholders' equity. - They have no effect on assets or liabilities. The corporation distributes stock dividends to stockholders in proportion to the number of shares the stockholders already own. Suppose a stockholder owns 1,000 shares of Greg's Games' common stock. If Greg's Games distributes a 10% stock dividend, the stockholder would receive 100 additional shares