Slide 1Dividends STUDY OBJECTIVE 1Cash DividendsEntries for Cash DividendsSlide 5Declaration DateRecord DatePayment DateAllocating Cash Dividends between Preferred and Common StockSlide 10Slide 11Stock DividendsSlide 13Purposes and Benefits of a Stock DividendStock Dividends DistinguishedEntries for Stock DividendsStatement Presentation of Common Stock Dividends DistributableStock Dividend EffectsStock SplitsStock Split EffectsDifferences between the Effects of Stock Splits and Stock DividendsRetained Earnings STUDY OBJECTIVE 2Stockholders’ Equity with DeficitRetained Earnings RestrictionsSlide 25Disclosure of RestrictionPrior Period AdjustmentsSlide 28Statement Presentation of Prior Period AdjustmentsDebits and Credits to Retained EarningsComprehensive Stockholders’ Equity Section STUDY OBJECTIVE 3Corporation Income Statements STUDY OBJECTIVE 4Income Statement with Income TaxesIncome Tax ExpenseEarnings per Share Study Objective 5Earnings per ShareEPS and Preferred Stock DividendsDisclosureSlide 39CHAPTER 15 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTINGWhat we will study and learn in this chapter:1 Preparing the entries for cash dividends and stock dividends.2 Identifying the items that are reported in a retained earnings statement.3 Preparing and analyzing a comprehensive stockholders’ equity section.4 Describing the form and content of corporation income statements.5 Computing earnings per share.DividendsSTUDY OBJECTIVE 1Distribution by a corporation to its stockholders on a pro rata (proportional) basis May be in the form of cash, property, scrip (promissory note to pay cash), or stockMay be expressed in one of two ways: 1. as a percentage of the par or stated value of the stock 2. as a dollar amount per shareCash DividendsFor a corporation to pay a cash dividend it must have:(a) retained earnings (b) adequate cash (c) a declaration of dividendsEntries for Cash DividendsThree important dates in connection with dividends:Declaration dateboard of directors formally declares a cash dividend and a liability is recordedRecord datemarks the time when ownership of outstanding shares is determined from the records maintained by the corporationPayment datedate dividend checks are mailed to the stockholders and the payment of the dividend is recorded.Key Dividend DatesDeclaration DateAssume that on December 1, 2002, the directors of Media General declare a 50 cent per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is $50,000 (100,000 x 50 cents) and the entry to record the declaration is:Record DateThe purpose of the record date is to identify the persons or entities that will receive the dividend, not to determine the dividend liability. For Media General, the record date is December 22. No entry is required on this date because the corporation’s liability recognized on the declaration date is unchanged.Payment DateAssuming the payment date is January 20 for Media General, the entry on that date is:Payment of the dividend REDUCES both current assets and current liabilities but has no effect on stockholders’ equity.Allocating Cash Dividends between Preferred and Common StockCash dividends– must be paid first to preferred stockholders before any common stockholders are paid. Cumulative preferred stock –any dividends in arrears and the current year dividend must be paid to preferred stockholders before allocating any dividends to common stockholders.Preferred stock is not cumulative–only the current year’s dividend must be paid to preferred stockholders before paying any dividends to common stockholders.Allocating Cash Dividends between Preferred and Common StockAssume that IBR Inc. has 1,000 shares of 8%, $100 par valuecumulative preferred stock and 50,000 shares of $10 par valuecommon stock outstanding at December 31, 2005. If the Board of Directors declares a $6,000 cash dividend on December 31, the entire $6,000 will go to preferred stockholders because their annual dividend is $8,000,(1,000 shares x $8) .$2,000 has goneinto arrears for preferred stockholdersAllocating Cash Dividends between Preferred and Common StockDividend in arrears, 2004 (1,000 x $2) $2,0002005 dividend (1,000 x $8) 8,000 10,000At December 31, 2005, IBR declares a $50,000 cash dividend. The allocation of the dividend to the two classes of stock is shown above.If the preferred stock was NON-cumulative, preferred stockholders would have received only $8,000 in dividends in 2005 and common stockholders would have received $42,000.Stock DividendsPro rata distribution to stockholders of the corporation’s own stock – 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.Stock DividendsPurposes and Benefits of a Stock DividendCorporations issue stock dividends generally for one or more of the following reasons:1)To satisfy stockholders’ dividend expectations without spending cash2)To increase the marketability of stock by increasing the number of shares3)To emphasize that a portion of stockholders’ equity has been permanently reinvested in the business and unavailable for cash dividendsStock Dividends DistinguishedSMALL stock dividend–less than 20-25% of the corporation’s issued stock –assign fair market value to SMALL stock dividends•assumption that a small stock dividend will have little effect on the market price of the shares previously outstanding. LARGE stock dividend–greater than 20-25% of the corporation’s issued stock–par or stated value per share is normally assignedAssume that Medland Corporation has a balance of $300,000 in retainedearnings 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 and the number of shares to be issued is 5,000 (10% of 50,000). The amount to be debited to Retained Earnings is $75,000 (5,000 x $15).Entries for Stock DividendsRetained 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 x $10), and the excess is credited to Paid-in