Chapter 14: Corporations: Dividends, Retained Earnings, and Income Reporting.

What are stock dividends?

Distribution of stock to stockholders on a proportional basis.

What is the Return on Common Stockholder's Equity?

Shows how many dollars of net income earned for each dollar invested by common stockholders) (Net Income - Preferred Dividends) / Average Common Stockholder's Equity = Return on Stockholder's Equity. (Begin Equity + Ending Equity) / 2 = Average common equity

What does earnings per share show?

Shows net income earned by each share of outstanding common stock).

Why issue stock dividends?

1.) Provides something of value to stockholder without spending cash. 2.) Increases the marketability of the stock since the higher number of outstanding shares will reduced the market price per share. 3.) Permanently reinvests retained earnings into the business (now unavailable for cash dividend).

What are the accounting entries for small stock dividends?

1.) Small Dividends (less than 20-25% of the issued shares) are assumed to not materially impact the stock price, so the fair market value (price) is used to record the dividend. -At declaration date - debit Stock Dividends / credit Common Stock Dividends Distributable (par value) and paid in capital in excess of par (the amount over par value). -When the shares are distributed - debit Common Stock Dividends Distributable / credit Common Stock (par value).

What are the effect of stock dividends?

Decreases retained earnings and increases paid-in capital.

Where to make adjustments if errors are uncovered from prior periods?

Directly to Retained Earnings.

What are cash dividends?

Distribution of cash to stockholders on a proportional basis.

What are stock splits?

issue additional shares to stockholders (similar to a dividend)

Retained Earnings Statement

recap of events that affect Retained Earnings (p.621) -beginning RE balance is adjusted for prior period adjustments, income (loss) and dividends (cash or stock) to arrive at the ending RE balance.

What is the effect of a stock split on book value and market price per share?

It will be lower after split.

What is the difference when recording Large Dividends?

Large Dividends (over 20-25% of the issued shares) use the par value to record the new shares.

What are the effects of a stock split?

No effect on Retained Earnings or Paid-in Capital. Increase the number of shares and reduce the par value per share. No accounting entries.

What does a stock split differ from a dividend?

Par value per share is reduced (e.g. a 2 for 1 stock split results in twice the number shares outstanding with par value per share half the amount as before the split).

What is the accounting entry for the end of the year for dividends?

debit Retained Earnings / credit Stock Dividends

Corporation Income Statements

1.) Includes income tax expense. Earnings per Share = (NI - Preferred Dividends) / weighted average common shares outstanding

How do you account for a cash dividend?

1.) Date of declaration / debit Cash Dividends / credit Dividends Payable. 2.) Record Date - No Entry. 3.) Payment Date - debit Dividends Payable / credit Cash. 4.) Closing Account for Year End - debit Retained Earnings / credit Cash Dividends

What are some rules for dividends?

1.) If you have retained earnings, you can issue a cash dividend. 2.) Must have cash available to pay the dividend. 3.) Board of Directors must declare the dividend before it is paid. 4.) Preferred stockholders receive their dividend before common stockholders. -May require allocating a dividend between the two classes of stockholders.

What are Retained Earnings?

Earnings retained in the business (see Retained Earnings Statement) -credit Retained Earnings for profit / debit Retaining Earnings for loss.

Can Retained Earnings be restricted?

Yes (legally, contractually, or voluntarily).