14
Corporations: CHAPTER Dividends, Retained Earnings, and Income Reporting
ASSIGNMENT CLASSIFICATION TABLE
Brief Exercises 1, 2, 3 A Problems 1A, 2A, 3A, 4A, 5A B Problems 1B, 2B, 3B, 4B, 5B
Study Objectives 1. Prepare the entries for cash dividends and stock dividends. Identify the items reported in a retained earnings statement. Prepare and analyze a comprehensive stockholders equity section. Describe the form and content of corporation income statements. Compute earnings per share.
Questions 1, 2, 3, 4, 5, 6, 7, 8
Exercises 1, 2, 3, 4, 5, 6, 7
2.
9, 10, 11, 12, 13, 14
4, 5
6, 8, 9
2A, 3A, 4A
2B, 3B, 4B
3.
14, 15
6, 7
5, 6, 10, 11, 13, 15, 16
1A, 2A, 3A, 4A, 5A
1B, 2B, 3B, 4B, 5B
4.
15, 16
8
12, 13, 14
5.
17
9, 10
12, 14, 15, 16, 17
3A
3B
14-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem Number Description 1A 2A Prepare dividend entries and stockholders equity section. Journalize and post transactions; prepare retained earnings statement and stockholders equity section. Prepare retained earnings statement and stockholders equity section, and compute earnings per share. Prepare the stockholders equity section, reflecting dividends and stock split. Prepare the stockholders equity section, reflecting various events. Prepare dividend entries and stockholders equity section. Journalize and post transactions; prepare retained earnings statement and stockholders equity section. Prepare retained earnings statement and stockholders equity section, and compute earnings per share. Prepare the stockholders equity section, reflecting dividends and stock split. Prepare the stockholders equity section, reflecting various events. Difficulty Time Level Allotted (min.) Simple Moderate 3040 3040
3A
Moderate
3040
4A
Moderate
2030
5A
Moderate
2030
1B 2B
Simple Moderate
3040 3040
3B
Moderate
3040
4B
Moderate
2030
5B
Moderate
2030
14-2
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
Knowledge Comprehension Q14-1 Q14-2 Q14-3 Q14-5 Q14-6 Q14-7 Q14-4 Q14-8 BE14-1 BE14-2 BE14-3 E14-1 E14-2 E14-3 Q14-14 Q14-10 BE14-4 BE14-5 E14-8 BE14-6 BE14-7 E14-5 E14-10 E14-11 E14-13 BE14-8 E14-12 BE14-9 BE14-10 E14-12 E14-14 E14-15 E14-15 E14-16 P14-1A P14-2A P14-3A P14-4A E14-9 P14-2B E14-6 P14-2A P14-3B P14-3A P14-4B P14-4A P14-5A E14-6 P14-1B P14-2B P14-3B P14-4B P14-5B E14-13 E14-14 E14-16 E14-17 P14-3A P14-3B Communication Financial Reporting Decision Making Across Comparative Analysis Exploring the Web the Organization All About You Ethics Case E14-4 E14-5 P14-1A P14-2A P14-3A P14-4A P14-5A P14-1B E14-6 P14-2B E14-7 P14-3B P14-4B P14-5B Application Analysis Synthesis Evaluation
Study Objective
1.
Prepare the entries for cash dividends and stock dividends.
BLOOMS TAXONOMY TABLE
2.
Identify the items reported in a retained earnings statement. Q14-14 Q14-15
Q14-12 Q14-9 Q14-11 Q14-13
3.
14-3
Q14-15 Q14-16 Q14-17
Prepare and analyze a comprehensive stockholders equity section.
4.
Describe the form and content of corporation income statements.
5.
Compute earnings per share.
Broadening Your Perspective
ANSWERS TO QUESTIONS
1. (a) A dividend is a distribution of cash or stock by a corporation to its stockholders on a pro rata (proportional) basis. (b) Disagree. Dividends may take four forms: cash, property, scrip (promissory note to pay cash), or stock. Sue DeVine is not correct. Adequate cash is only one of the conditions. In order for a cash dividend to occur, a corporation must also have retained earnings and the dividend must be declared by the board of directors. (a) The three dates are: Declaration date is the date when the board of directors formally declares the cash dividend and announces it to stockholders. The declaration commits the corporation to a binding legal obligation that cannot be rescinded. Record date is the date that marks the time when ownership of the outstanding shares is determined from the stockholder records maintained by the corporation. The purpose of this date is to identify the persons or entities that will receive the dividend. Payment date is the date on which the dividend checks are mailed to the stockholders. (b) The accounting entries and their dates are: Declaration dateDebit Retained Earnings and Credit Dividends Payable. No entry is made on the record date. Payment dateDebit Dividends Payable and Credit Cash. The allocation of the cash dividend is as follows: Total dividend............................................................................................... Allocated to preferred stock Dividends in arrearsone year....................................................... Current year dividend ........................................................................ Remainder allocated to common stock................................................... 5. $45,000 $10,000 10,000
2.
3.
4.
20,000 $25,000
A cash dividend decreases assets, retained earnings, and total stockholders equity. A stock dividend decreases retained earnings, increases paid-in capital, and has no effect on total assets and total stockholders equity. A corporation generally issues stock dividends for one of the following reasons: (1) To satisfy stockholders dividend expectations without spending cash. (2) To increase the marketability of its stock by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the stock makes the shares easier to purchase for smaller investors. (3) To emphasize that a portion of stockholders equity that had been reported as retained earnings has been permanently reinvested in the business and therefore is unavailable for cash dividends. In a stock split, the number of shares is increased in the same proportion that par value is decreased. Thus, in the Meenen Corporation the number of shares will increase to 60,000 = (30,000 X 2) and the par value will decrease to $5 = ($10 2). The effect of a split on market value is generally inversely proportional to the size of the split. In this case, the market price would fall to approximately $60 per share ($120 2).
6.
7.
14-4
Questions Chapter 14 (Continued)
8.
The different effects of a stock split versus a stock dividend are: Item Total paid-in capital Total retained earnings Total par value (common stock) Par value per share Stock Split No change No change No change Decrease Stock Dividend Increase Decrease Increase No Change
9.
A prior period adjustment is a correction of an error in previously issued financial statements. The correction is reported in the current years retained earnings statement as an adjustment of the beginning balance of retained earnings. The understatement of depreciation in a prior year overstates the beginning retained earnings balance. The retained earnings statement presentation is: Balance, January 1, as reported ................................................................................... Correction for understatement of prior years depreciation ..................................... Balance, January 1, as adjusted................................................................................... $210,000 (50,000) $160,000
10.
11.
The purpose of a retained earnings restriction is to indicate that a portion of retained earnings is currently unavailable for dividends. Restrictions may result from the following causes: legal, contractual, or voluntary. Retained earnings restrictions are generally reported in the notes to the financial statements. The debits and credits to retained earnings are: Debits 1. 2. 3. 4. Net loss Prior period adjustments for overstatement of net income Cash and stock dividends Some disposals of treasury stock Credits 1. Net income 2. Prior period adjustments for understatement of net income
12. 13.
14.
Juan is incorrect. Only the ending balance of retained earnings is reported in the stockholders equity section. Gene should be told that although many factors affect the market price of a stock at a given time, the reported net income is one of the most significant factors. When companies announce increases or decreases in net income, the market price of their stock usually increases or decreases immediately. Net income also provides an indication of the amount of dividends that a company can distribute. In addition, net income leads to a growth in retained earnings, which is often reflected in a stocks market price.
15.
14-5
Questions Chapter 14 (Continued) 16. The unique feature of a corporation income statement is a separate section that shows income taxes or income tax expense. The presentation is as follows: Income before income taxes .................................................................................................. Income tax expense................................................................................................................. Net income................................................................................................................................. 17. $500,000 150,000 $350,000
Earnings per share means earnings per share of common stock. Preferred stock dividends are subtracted from net income in computing EPS in order to obtain income available to common stockholders.
14-6
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 14-1 Nov. 1 Retained Earnings (80,000 X $1/share)............ Dividends Payable ......................................... Dividends Payable.................................................. Cash ................................................................... 80,000 80,000 80,000 80,000
Dec. 31
BRIEF EXERCISE 14-2 Dec. 1 Retained Earnings (5,000 X $16)........................ Common Stock Dividends Distributable (5,000 X $10)................................................ Paid-in Capital in Excess of Par Value (5,000 X $6) ...................................... Common Stock Dividends Distributable......... Common Stock ............................................... 80,000 50,000 30,000 50,000 50,000
31
BRIEF EXERCISE 14-3 Before Dividend (a) Stockholders equity Paid-in capital Common stock, $10 par In excess of par value Total paid-in capital Retained earnings Total stockholders equity Outstanding shares Book value per share After Dividend
$2,000,000 2,000,000 500,000 $2,500,000 200,000 $12.50
$2,200,000 80,000 2,280,000 220,000 $2,500,000 220,000 $11.36
(b) (c)
14-7
BRIEF EXERCISE 14-4 KERNS INC. Retained Earnings Statement For the Year Ended December 31, 2008 Balance, January 1..................................................................................... Add: Net income....................................................................................... Less: Dividends ......................................................................................... Balance, December 31 .............................................................................. $220,000 140,000 360,000 85,000 $275,000
BRIEF EXERCISE 14-5 PERSINGER INC. Retained Earnings Statement For the Year Ended December 31, 2008 Balance, January 1 as reported ........................................ Correction for overstatement of net income in prior period (depreciation expense error)........... Balance, January 1, as adjusted....................................... Add: Net income................................................................... Less: Cash dividend............................................................ Stock dividend .......................................................... Balance, December 31 ......................................................... $90,000 8,000 $800,000 (50,000) 750,000 120,000 870,000 98,000 $772,000
BRIEF EXERCISE 14-6 Return on stockholders equity ratio: $386
$2,210 + $2,510 = 16.4% 2
BRIEF EXERCISE 14-7 Return on common stockholders equity
14-8
$152,000 = 20% ($700,000 + $820,000) 2
BRIEF EXERCISE 14-8 DIXEN CORPORATION Income Statement For the Year Ended December 31, 2008 Sales.............................................................................................................. Cost of goods sold ................................................................................... Gross profit ................................................................................................. Operating expenses ................................................................................. Income from operations.......................................................................... Other revenues and gains...................................................................... Income before income taxes ................................................................. Income tax expense ($220,000 X 30%)............................................... Net income .................................................................................................. $450,000 205,000 245,000 75,000 170,000 50,000 220,000 66,000 $154,000
BRIEF EXERCISE 14-9 Earnings per share = $1.90, or ($380,000 200,000)
BRIEF EXERCISE 14-10 Earnings per share = $1.80, or [($380,000 $20,000) 200,000]
14-9
SOLUTIONS TO EXERCISES
EXERCISE 14-1 (a) June 15 Retained Earnings (120,000 X $1)......... Dividends Payable ............................ Dividends Payable ..................................... Cash....................................................... Retained Earnings (122,000 X $1.20) ... Dividends Payable ............................ 120,000 120,000 120,000 120,000 146,400 146,400
July 10
Dec. 15
(b) In the retained earnings statement, dividends of $266,400 will be deducted. In the balance sheet, Dividends Payable of $146,400 will be reported as a current liability.
EXERCISE 14-2 (a) Total dividend declaration Allocation to preferred stock Remainder to common stock (b) Total dividend declaration Allocation to preferred stock Remainder to common stock
1
2007 $6,000 6,000 $ 0 2007 $6,000 6,000 $ 0
2008 $12,000 7,000 $ 5,000 2008 $12,000 10,0001 $ 2,000
2009 $28,000 7,000 $21,000 2009 $28,000 8,000 $20,000
Dividends in arrears for Year 1, $2,000 + current dividend for Year 2, $8,000. Retained Earnings ......................................... Dividends Payable ................................ 28,000 28,000
(c) Dec. 31
14-10
EXERCISE 14-3 (a) Retained Earnings (21,000* X $18) ............................. Common Stock Dividends Distributable ......... (21,000 X $10) Paid-in Capital in Excess of Par Value............. (21,000 X $8) *[($1,000,000 $10) + 40,000] X 15%. (b) Retained Earnings (36,000* X $20) ............................. Common Stock Dividends Distributable ......... (36,000 X $5) Paid-in Capital in Excess of Par Value............. (36,000 X $15) *[($1,000,000 5) + 40,000] X 15%. 720,000 180,000 540,000 378,000 210,000 168,000
EXERCISE 14-4
After Stock Dividend After Stock Split
Before Action Stockholders equity Paid-in capital Common stock In excess of par value Total paid-in capital Retained earnings Total stockholders equity Outstanding shares Book value per share
$ 300,000 0 300,000 900,000 $1,200,000 30,000 $40.00
$ 315,000 6,000 321,000 879,000 $1,200,000 31,500 $38.10
$ 300,000 0 300,000 900,000 $1,200,000 60,000 $20.00
14-11
EXERCISE 14-5 (a) (1) Book value before the stock dividend was $7.25 ($580,000 80,000). (2) Book value after the stock dividend is $6.59 ($580,000 88,000). (b) Common stock Balance before dividend ......................................................... Dividend shares (8,000 X $5) ................................................. New balance ....................................................................... Paid-in capital in excess of par value Balance before dividend ......................................................... Excess over par of shares issued (8,000 X $10) ............. New balance ....................................................................... Retained earnings Balance before dividend ......................................................... Dividend (8,000 X $15).............................................................. New balance .......................................................................
$400,000 40,000 $440,000
$ 25,000 80,000 $105,000
$155,000 120,000 $ 35,000
EXERCISE 14-6
Paid-in Capital Item 1. 2. 3. 4. 5. 6. 7. 8. Capital Stock NE I NE I NE NE NE I Additional NE NE NE I NE NE NE I Retained Earnings D NE NE D D NE NE NE
14-12
EXERCISE 14-7 1. Dec. 31 Retained Earnings ............................... Interest Expense ......................... Retained Earnings ............................... Dividends Payable............................... Common Stock Dividends Distributable............................. Paid-in Capital in Excess of Par Value .............................. Common Stock ..................................... Retained Earnings ...................... 50,000 50,000 8,000 10,000 10,000 8,000 2,000,000 2,000,000
2.
31
3.
31
EXERCISE 14-8 FELTER CORPORATION Retained Earnings Statement For the Year Ended December 31, 2008 Balance, January 1, as reported ................................... Correction for overstatement of 2007 net income (depreciation error) ....................................... Balance, January 1, as adjusted ................................... Add: Net income................................................................ Less: Cash dividends ...................................................... Stock dividends..................................................... Balance, December 31...................................................... $120,000 60,000 $550,000 (40,000) 510,000 350,000 860,000 180,000 $680,000
14-13
EXERCISE 14-9 SASHA COMPANY Retained Earnings Statement For the Year Ended December 31, 2008 Balance, January 1, as reported........................................ Correction for understatement of 2006 net income......... Balance, January 1, as adjusted........................................ Add: Net income ..................................................................... Less: Cash dividends............................................................ $100,0001 Stock dividends .......................................................... 150,0002 Balance, December 31 ..........................................................
1
$310,000 20,000 330,000 285,000 615,000 (250,000) $365,000
(200,000 X $.50/sh)
2
(200,000 X .05 X $15/sh)
EXERCISE 14-10 KELLY GROUCUTT COMPANY Balance Sheet (Partial) December 31, 2008 Paid-in capital Capital stock Preferred stock.......................................................... $125,000 Common stock .......................................................... 400,000 Total capital stock............................................. $ 525,000 Additional paid-in capital In excess of par valuepreferred stock........... 75,000 In excess of par valuecommon stock............ 100,000 Total additional paid-in capital ..................... 175,000 Total paid-in capital ............................................................... 700,000 Retained earnings .................................................................. 334,000* Total paid-in capital and retained earnings ................... 1,034,000 Less treasury stockcommon.......................................... (40,000) Total stockholders equity................................................... $ 994,000 *$250,000 + $140,000 $56,000
14-14
EXERCISE 14-11 ORTIZ INC. Balance Sheet (Partial) December 31, 200X Stockholders equity Paid-in capital Capital stock 8% Preferred stock, $5 par value, 40,000 shares authorized, 30,000 shares issued ...................... Common stock, no par, $1 stated value, 400,000 shares authorized, 300,000 shares issued and 290,000 outstanding ............... Common stock dividends distributable....................................... Total capital stock....................... Additional paid-in capital In excess of par value preferred stock ................................. In excess of stated value common stock .................................. Total additional paid-in capital ......................................... Total paid-in capital .................... Retained earnings (see Note R)......................... Total paid-in capital and retained earnings.................... Less: Treasury stock (10,000 common shares) ..................................................... Total stockholders equity........
$ 150,000
$ 300,000 30,000 330,000 480,000
344,000 1,200,000 1,544,000 2,024,000 800,000 2,824,000 74,000 $2,750,000
Note R: Retained earnings is restricted for plant expansion, $100,000.
14-15
EXERCISE 14-12 (a) PATEL CORPORATION Income Statement For the Year Ended December 31, 2008 ______________________________________________________________ $800,000 465,000 335,000 110,000 225,000 $92,000 (32,000) 60,000 285,000 57,000 $228,000
Sales ............................................................................................. Cost of goods sold................................................................... Gross profit ................................................................................ Operating expenses................................................................. Income from operations ......................................................... Other revenues and gains ..................................................... Other expenses and losses................................................... Income before income taxes ................................................ Income tax expense ($285,000 X 20%) .............................. Net income.................................................................................. (b)
Earnings per share = $3.96, or [($228,000 $30,000) 50,000]
EXERCISE 14-13 (a) MIKE SINGLETARY CORPORATION Income Statement For the Year Ended December 31, 2008 ______________________________________________________________ $ 600,000 360,000 240,000 153,000 87,000 7,500 79,500 23,850 $ 55,650
Net sales ...................................................................................... Cost of goods sold................................................................... Gross profit ................................................................................ Operating expenses................................................................. Income from operations ......................................................... Interest expense........................................................................ Income before income taxes ................................................ Income tax expense (30% X $79,500)................................. Net income.................................................................................. (b)
Net income preferred dividends $55,650 $15,000 = = 20.3% Average common stockholders equity $200,000
14-16
EXERCISE 14-14 Net income: $2,000,000 $1,200,000 = $800,000; $800,000 (30% X $800,000) = $560,000 Preferred dividends: (50,000 X $20) X 8% = $80,000 Average common shares outstanding: 200,000 Earnings per share: $560,000 $80,000 = $2.40 200,000
EXERCISE 14-15
2008 Earnings per share
$290, 000 $20, 000 100, 000
2007 = $2.70
$200, 000 $20, 000 80, 000 $200, 000 $20, 000 $900, 000
= $2.25
Return on common stockholders equity
$290, 000 $20, 000 $1, 200, 000
= 22.5%
= 20.0%
EXERCISE 14-16
2008 Earnings per share
$290, 000 $20, 000 150, 000
2007 = $1.80
$248, 000 $20, 000 180, 000 $248, 000 $20, 000 $1, 900, 000
= $1.27
Return on common stockholders equity
$290, 000 $20, 000 $1, 800, 000
= 15.0%
= 12.0%
14-17
EXERCISE 14-17 (a)
$241,000 $16,000 = $2.25 100,000
(b)
$241,000 $16,000 = $2.50 90,000*
*100,000 10,000 = 90,000.
14-18
SOLUTIONS TO PROBLEMS
PROBLEM 14-1A
(a) Feb.
1
Retained Earnings (60,000 X $1)............. Dividends Payable.............................. Dividends Payable....................................... Cash ........................................................ Memotwo-for-one stock split increases number of shares to 120,000 = (60,000 X 2) and reduces par value to $10 per share. Retained Earnings (12,000 X $13) .......... Common Stock Dividends Distributable (12,000 X $10) ........ Paid-in Capital in Excess of Par Value (12,000 X $3)................. Common Stock Dividends Distributable.............................................. Common Stock .................................... Retained Earnings (132,000 X $.50) ....... Dividends Payable.............................. Income Summary......................................... Retained Earnings ..............................
60,000 60,000 60,000 60,000
Mar.
1
Apr.
1
July
1
156,000 120,000 36,000
31
120,000 120,000 66,000 66,000 350,000 350,000
Dec.
1
31
(b) Common Stock
Date Jan. Apr. July 1 1 31 Explanation Balance 2 for 1 splitnew par $10 Ref. Debit Credit Balance 1,200,000
120,000
1,320,000
14-19
PROBLEM 14-1A (Continued) Common Stock Dividends Distributable
Date July Explanation 1 31 Ref. Debit 120,000 Credit 120,000 120,000 Balance 0
Paid-in Capital in Excess of Par Value
Date Jan. July 1 1 Explanation Balance Ref. Debit Credit 36,000 Balance 200,000 236,000
Retained Earnings
Date Jan. Feb. July Dec. 1 1 1 1 31 Explanation Balance Cash dividend Stock dividend Cash dividend Net income Ref. Debit 60,000 156,000 66,000 350,000 Credit Balance 600,000 540,000 384,000 318,000 668,000
(c)
CAROLINAS CORPORATION Balance Sheet (Partial) December 31, 2008 Stockholders equity Paid-in capital Capital stock Common stock, $10 par value, 132,000 shares issued and outstanding.................. Additional paid-in capital In excess of par value ........................................ Total paid-in capital.................................... Retained earnings ................................................................. Total stockholders equity .......................
$1,320,000 236,000 1,556,000 668,000 $2,224,000
14-20
PROBLEM 14-2A
(a) July
1
Retained Earnings ....................................... [($800,000 $5) X $.50] Dividends PayableCommon Stock................................................... Retained Earnings ....................................... Accumulated Depreciation .............. Dividends PayableCommon Stock............................................................ Cash ........................................................ Retained Earnings (16,000 X $18) .......... Common Stock Dividends Distributable (16,000 X $5) .......... Paid-in Capital in Excess of Par ValueCommon Stock......... (16,000 X $13) Retained Earnings (12,000 X $3)............. Dividends PayablePreferred Stock................................................... Income Summary......................................... Retained Earnings ..............................
80,000
80,000 25,000 25,000
Aug. 1
Sept. 1
80,000 80,000 288,000 80,000 208,000
Dec.
1
15
36,000 36,000 355,000 355,000
31
(b) Preferred Stock
Date Jan. 1 Explanation Balance Ref. Debit Credit Balance 600,000
Common Stock
Date Jan. 1 Explanation Balance Ref. Debit Credit Balance 800,000
14-21
PROBLEM 14-2A (Continued) Common Stock Dividends Distributable
Date Dec. Explanation 1 Ref. Debit Credit 80,000 Balance 80,000
Paid-in Capital in Excess of Par ValuePreferred Stock
Date Jan. 1 Explanation Balance Ref. Debit Credit Balance 200,000
Paid-in Capital in Excess of Par ValueCommon Stock
Date Jan. Dec. 1 1 Explanation Balance Ref. Debit Credit 208,000 Balance 300,000 508,000
Retained Earnings
Date Jan. July Aug. 1 1 1 Explanation Balance Cash dividend common Prior period adjustment depreciation Stock dividend common Cash dividend preferred Net income Ref. Debit Credit Balance 800,000 720,000
80,000
25,000 288,000 36,000 355,000
695,000 407,000 371,000 726,000
Dec.
1
Dec. 15 Dec. 31
14-22
PROBLEM 14-2A (Continued) (c) HASHMI COMPANY Retained Earnings Statement For the Year Ended December 31, 2008 Balance, January 1, as reported ........................ Correction of 2007 depreciation......................... Balance, January 1, as adjusted ........................ Add: Net income ................................................... Less: Cash dividendspreferred..................... Stock dividendscommon..................... Cash dividendscommon...................... Balance, December 31........................................... (d) HASHMI COMPANY Balance Sheet (Partial) December 31, 2008 Stockholders equity Paid-in capital Capital stock 6% Preferred stock, $50 par value, 12,000 shares issued..... Common stock, $5 par value, 160,000 shares issued ............... Common stock dividends distributable (16,000 shares) ............................. Total capital stock ................... Additional paid-in capital In excess of par value preferred stock............................. In excess of par value common stock.............................. Total additional paid-in capital...................................... Total paid-in capital................. Retained earnings (see Note B) .................. Total stockholders equity....................................... $ 36,000 288,000 80,000 $ 800,000 25,000 775,000 355,000 1,130,000 404,000 $ 726,000
$ 600,000 $800,000 80,000 880,000 1,480,000
200,000 508,000 708,000 2,188,000 726,000 $2,914,000
Note B: Retained earnings is restricted for plant expansion, $200,000.
14-23
PROBLEM 14-3A
(a)
Retained Earnings Sept. 1 Prior Per. Adj. 63,000 Jan. 1 Balance Oct. 1 Cash Dividend 250,000 Dec. 31 Net Income Dec. 31 Stock Dividend 400,000 Dec. 31 Balance
1,170,000 585,000 1,042,000
(b)
DOLD CORPORATION Retained Earnings Statement For the Year Ended December 31, 2008 Balance, January 1, as reported....................... Correction of overstatement of 2007 net income because of understatement of depreciation ........................................................ Balance, January 1, as adjusted....................... Add: Net income.................................................. Less: Cash dividends.......................................... Stock dividends ........................................ Balance, December 31 ......................................... $250,000 400,000 $1,170,000
(63,000) 1,107,000 585,000 1,692,000 650,000 $1,042,000
(c)
DOLD CORPORATION Partial Balance Sheet December 31, 2008 Stockholders equity Paid-in capital Capital stock 6% Preferred stock, $50 par value, cumulative, 20,000 shares authorized, 15,000 shares issued and outstanding..................................
$ 750,000
14-24
PROBLEM 14-3A (Continued) DOLD CORPORATION (Continued) Common stock, $10 par value, 500,000 shares authorized, 250,000 shares issued and outstanding ................................ Common stock dividends distributable ............................... Total capital stock................. Additional paid-in capital In excess of par value preferred stock .......................... In excess of par value common stock........................... Total additional paid-in capital ................................... Total paid-in capital.............. Retained earnings (see Note X)................ Total stockholders equity....................................
$2,500,000 250,000 2,750,000 3,500,000
250,000 400,000 650,000 4,150,000 1,042,000 $5,192,000
Note X: Retained earnings is restricted for plant expansion, $200,000. (d)
$585,000 $45,000 = $2.25 240,000
*15,000 X $3 = $45,000
(e) Total cash dividend .............................................. Allocated to preferred stock Dividend in arrears2007 ......................... (15,000 X $3) 2008 dividend................................................. Remainder to common stock ............................
$250,000 $45,000 45,000 90,000 $160,000
14-25
PROBLEM 14-4A (a) PATTINI CORPORATION Partial Balance Sheet March 31, 2008 Stockholders equity Paid-in capital Capital stock Common stock, no-par value, 90,000 shares issued and outstanding........ Retained earnings ................................................................... Total stockholders equity............................... (b) PATTINI CORPORATION Partial Balance Sheet June 30, 2008 Stockholders equity Paid-in capital Capital stock Common stock, no-par value, 360,000 shares issued and outstanding ..... Retained earnings ................................................................... Total stockholders equity............................... (c) PATTINI CORPORATION Partial Balance Sheet September 30, 2008 Stockholders equity Paid-in capital Capital stock Common stock, no-par value, 378,000 shares issued and outstanding ............ $1,634,000* Retained earnings .................................................................... 176,000** Total stockholders equity............................... $1,810,000 *$1,400,000 + [(360,000 X .05) X $13]
14-26
$1,400,000 410,000 $1,810,000
$1,400,000 410,000 $1,810,000
**$410,000 $234,000
PROBLEM 14-4A (Continued)
(d)
PATTINI CORPORATION Partial Balance Sheet December 31, 2008 Stockholders equity Paid-in capital Capital stock Common stock, no-par value, 378,000 shares issued and outstanding........ Retained earnings ................................................................... Total stockholders equity............................... *$176,000 ($.50 X 378,000) + $350,000
$1,634,000 337,000* $1,971,000
14-27
PROBLEM 14-5A
Preliminary analysis (in thousands)NOT REQUIRED Common Stock Dividends Distributable $200
Balance, Jan. 1 1. Issued 50,000 shares for stock dividend 2. Issued 30,000 shares for cash 3. Corrected error in 2006 net income 4. Declared cash dividend 5. Net income for year Balance, Dec. 31
Common Stock $1,500
Retained Earnings $600
Total $2,300
200 180
(200)
0 180 70 (80) 300 $890 70 (80) 300 $2,770
$1,880
$
0
YADIER INC. Stockholders Equity Section of Balance Sheet December 31, 2008 Stockholders equity Paid-in capital Capital stock Common stock, no-par value, 580,000 shares issued and outstanding ......... Retained earnings ................................................................... Total stockholders equity ................................
$1,880,000 890,000 $2,770,000
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PROBLEM 14-1B
(a) Jan. 15 Feb. 15 Apr. 15
Retained Earnings (100,000 X $1) .......... Dividends Payable.............................. Dividends Payable....................................... Cash ........................................................ Retained Earnings (10,000 X $15) .......... Common Stock Dividends Distributable (10,000 X $10) ........ Paid-in Capital in Excess of Par Value (10,000 X $5)................. Common Stock Dividends Distributable.............................................. Common Stock (10,000 X $10)........ Memotwo-for-one stock split increases the number of shares outstanding to 220,000, or (110,000 X 2) and reduces par value to $5 per share. Retained Earnings (220,000 X $.50) ....... Dividends Payable.............................. Income Summary......................................... Retained Earnings ..............................
100,000 100,000 100,000 100,000 150,000 100,000 50,000 100,000 100,000
May 15
July
1
Dec.
1 31
110,000 110,000 250,000 250,000
(b) Common Stock
Date Jan. 1 May 15 July 1 Explanation Balance 2 for 1 stock split new par value = $5 Ref. Debit Credit 100,000 Balance 1,000,000 1,100,000
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PROBLEM 14-1B (Continued) Common Stock Dividends Distributable
Date Apr. 15 May 15 Explanation Ref. Debit 100,000 Credit 100,000 Balance 100,000 0
Paid-in Capital in Excess of Par Value
Date Jan. 1 Apr. 15 Explanation Balance Ref. Debit Credit 50,000 Balance 200,000 250,000
Retained Earnings
Date Jan. 1 15 Apr. 15 Dec. 1 31 Explanation Balance Cash dividends Stock dividends Cash dividends Net income Ref. Debit 100,000 150,000 110,000 250,000 Credit Balance 540,000 440,000 290,000 180,000 430,000
(c)
VERLIN CORPORATION Balance Sheet (Partial) December 31, 2008 Stockholders equity Paid-in capital Capital stock Common stock, $5 par value, 220,000 shares issued and outstanding.................. Additional paid-in capital In excess of par value ........................................ Total paid-in capital.................................... Retained earnings ................................................................. Total stockholders equity .......................
$1,100,000 250,000 1,350,000 430,000 $1,780,000
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PROBLEM 14-2B
(a) July
1
Retained Earnings ....................................... [($800,000 $10) X $.50] Dividends PayableCommon Stock................................................... Accumulated Depreciation ....................... Retained Earnings .............................. Dividends PayableCommon Stock............................................................ Cash ........................................................ Retained Earnings (8,000 X $16)............. Common Stock Dividends Distributable (8,000 X $10) .......... Paid-in Capital in Excess of Par ValueCommon Stock......... (8,000 X $6) Retained Earnings (5,000 X $7) ............... Dividends PayablePreferred Stock................................................... Income Summary......................................... Retained Earnings ..............................
40,000
40,000 72,000 72,000
Aug. 1
Sept. 1
40,000 40,000 128,000 80,000 48,000
Dec.
1
15
35,000 35,000 350,000 350,000
31
(b) Preferred Stock
Date Jan. 1 Explanation Balance Ref. Debit Credit Balance 500,000
Common Stock
Date Jan. 1 Explanation Balance Ref. Debit Credit Balance 800,000
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PROBLEM 14-2B (Continued) Common Stock Dividends Distributable
Date Dec. Explanation 1 Ref. Debit Credit 80,000 Balance 80,000
Paid-in Capital in Excess of Par ValuePreferred Stock
Date Jan. 1 Explanation Balance Ref. Debit Credit Balance 100,000
Paid-in Capital in Excess of Par ValueCommon Stock
Date Jan. Dec. 1 1 Explanation Balance Ref. Debit Credit 48,000 Balance 200,000 248,000
Retained Earnings
Date Jan. July Aug. Dec. 1 1 1 1 15 31 Explanation Balance Cash dividends common Prior period adjustment Stock dividends common Cash dividends preferred Net income Ref. Debit Credit Balance 500,000 460,000 72,000 128,000 35,000 350,000 532,000 404,000 369,000 719,000
40,000
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PROBLEM 14-2B (Continued) (c) HOLMES, INC. Retained Earnings Statement For the Year Ended December 31, 2008 Balance, January 1, as reported .......................... Correction of 2007 depreciation........................... Balance, January 1, as adjusted .......................... Add: Net income ..................................................... Less: Cash dividendspreferred....................... Stock dividendscommon....................... Cash dividendscommon........................ Balance, December 31............................................. (d) HOLMES, INC. Balance Sheet (Partial) December 31, 2008 Stockholders equity Paid-in capital Capital stock 7% Preferred stock, $100 par value, 5,000 shares issued ...... Common stock, $10 par value, 80,000 shares issued................. Common stock dividends distributable ................................. Total capital stock .................. Additional paid-in capital In excess of par value preferred stock............................ In excess of par value common stock............................. Total additional paid-in capital..................................... Total paid-in capital................ Retained earnings........................................... Total stockholders equity......................................
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$500,000 72,000 572,000 350,000 922,000 $ 35,000 128,000 40,000
203,000 $719,000
$ 500,000 $800,000 80,000 880,000 1,380,000
100,000 248,000 348,000 1,728,000 719,000 $2,447,000
PROBLEM 14-3B
(a) Nov. 1 Cash Dividend Dec. 31 Stock Dividend
Retained Earnings 600,000 Jan. 1 Balance 360,000 Dec. 31 Dec. 31 Balance
2,450,000 840,000 2,330,000
(b)
TAGUCI CORPORATION Retained Earnings Statement For the Year Ended December 31, 2008 Balance, January 1................................................. Add: Net income................................................... Less: Cash dividends .......................................... Stock dividends ........................................ Balance, December 31 .......................................... $600,000 360,000 $2,450,000 840,000 3,290,000 960,000 $2,330,000
(c)
TAGUCI CORPORATION Partial Balance Sheet December 31, 2008 ___________________________________________________________ Stockholders equity Paid-in capital Capital stock 6% Preferred stock, $100 par value, noncumulative, callable at $125, 20,000 shares authorized, 10,000 shares issued and outstanding ........................................ $1,000,000 Common stock, no par, $5 stated value, 600,000 shares authorized, 400,000 shares issued and outstanding .......... $2,000,000 Common stock dividends distributable................................ 200,000 2,200,000 Total capital stock ................. 3,200,000
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PROBLEM 14-3B (Continued) TAGUCI CORPORATION (Continued) Additional paid-in capital In excess of par value preferred stock .......................... In excess of stated value common stock........................... Total additional paid-in capital ................................... Total paid-in capital.............. Retained earnings (see Note A)................ Total stockholders equity....................................
$ 200,000 1,180,000 1,380,000 4,580,000 2,330,000 $6,910,000
Note A: Retained earnings is restricted for plant expansion, $100,000. (d)
$840,000 $60,000 * = $2.40 325,000
*10,000 X $6 = $60,000
(e) Total dividend...................................................................................... Allocated to preferred stockcurrent year only ..................... Remainder to common stock .........................................................
$600,000 60,000 $540,000
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PROBLEM 14-4B
(a)
ERWIN CORPORATION Partial Balance Sheet March 31, 2008 Stockholders equity Paid-in capital Capital stock Common stock, no-par value, 150,000 shares issued and outstanding......... Retained earnings ................................................................... Total stockholders equity..............................
$2,800,000 850,000 $3,650,000
(b)
ERWIN CORPORATION Partial Balance Sheet JUNE 30, 2008 Stockholders equity Paid-in capital Capital stock Common stock, no-par value, 600,000 shares issued and outstanding ........ Retained earnings ................................................................... Total stockholders equity..............................
$2,800,000 850,000 $3,650,000
(c)
ERWIN CORPORATION Partial Balance Sheet September 30, 2008 Stockholders equity Paid-in capital Capital stock Common stock, no-par value, 630,000 shares issued and outstanding............ $3,190,000* Retained earnings ................................................................... 460,000** Total stockholders equity.............................. $3,650,000 *$2,800,000 + [(600,000 X .05) X $13]
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**$850,000 $390,000
PROBLEM 14-4B (Continued) (d) ERWIN CORPORATION Partial Balance Sheet December 31, 2008 Stockholders equity Paid-in capital Capital stock Common stock, no-par value, 630,000 shares issued and outstanding......... Retained earnings .................................................................... Total stockholders equity ............................. *$460,000 ($.50 X 630,000) + $700,000
$3,190,000 845,000* $4,035,000
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PROBLEM 14-5B
Preliminary analysis (in thousands)NOT REQUIRED Common Stock Dividends Distributable $400
Balance, Jan. 1 1. Issued 100,000 shares for stock dividend 2. Issued 40,000 shares for cash 3. Corrected error in 2006 net income 4. Declared cash dividend 5. Net income for year Balance, Dec. 31
Common Stock $3,000
Retained Earnings $1,200
Total $4,600
400 200
(400)
0 200 140 (500) 600 $1,440 140 (500) 600 $5,040
$3,600
$
0
MORALES INC. Stockholders Equity Section of Balance Sheet December 31, 2008 Stockholders equity Paid-in capital Capital stock Common stock, no-par value, 1,140,000 shares issued and outstanding....... Retained earnings ................................................................... Total stockholders equity..................................
$3,600,000 1,440,000 $5,040,000
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BYP 14-1
FINANCIAL REPORTING PROBLEM
According to the Consolidated Statement of Common Shareholders Equity, the company declared dividends on common stock of $1,684 million during the year-ended December 31, 2005. The company declared dividends on common stock of $1,438 million during the year ended December 25, 2004.
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BYP 14-2
COMPARATIVE ANALYSIS PROBLEM
(a)
Earnings per share
PepsiCo
Coca-Cola
$4, 078 $3 1, 669
= $2.44
$4, 872 $0 2, 392
= $2.04
Return on common stockholders equity
$4, 078 $3 ($13, 572 + $14, 320) 2
= 29.2%
$4, 872 $0 ($15, 935 + $16, 355) 2
= 30.2%
The return on common stockholders equity can be used to compare the profitability of two companies. It shows how many dollars of net income were earned for each dollar invested by the owners. Since this ratio is expressed as a percent instead of a dollar amount like earnings per share, it can be used to compare PepsiCo and Coca-Cola. During 2005, Coca-Cola was slightly (3%) more profitable than PepsiCo based on their respective returns on common stockholders equity. Earnings per share measures cannot be compared across companies because they may use vastly different numbers of shares to finance the company. (b) PepsiCo paid cash dividends of $1,642 million and Coca-Cola paid $2,678 million of cash dividends in 2005.
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BYP 14-3
EXPLORING THE WEB
Answers will vary depending on the company chosen by the student.
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BYP 14-4
DECISION MAKING ACROSS THE ORGANIZATION
Journal entriesNOT REQUIRED
July
1
Retained Earnings ................................... (140,000 X $0.50) Dividends Payable ............................ Accumulated Depreciation ................... Retained Earnings............................. Dividends Payable ................................... Cash....................................................... Retained Earnings (14,000 X $12)....... Common Stock Dividends Distributable........................................ Retained Earnings (4,000 X $9) ........... Dividends Payable ............................ Income Summary ..................................... Retained Earnings.............................
70,000 70,000 72,000 72,000 70,000 70,000 168,000 168,000 36,000 36,000 320,000 320,000
Aug.
1
Sept.
1
Dec.
1
15
31
(a)
FERNANDEZ, INC. Retained Earnings Statement For the Year Ended December 31, 2008 $500,000 72,000 572,000 320,000 892,000 $ 36,000 168,000 70,000
Balance, January 1, as previously reported................. Correction of 2007 depreciation ....................................... Balance, January 1, as corrected..................................... Add: Net income ................................................................. Less: Cash dividendspreferred................................... Stock dividendscommon................................... Cash dividendscommon.................................... Balance, December 31 .........................................................
274,000 $618,000
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BYP 14-4 (Continued) (b) Treating the overstatement of 2007 depreciation expense as an adjustment of 2008 income would be incorrect because it applies to the prior years income statement and would distort depreciation expense for 2008. Companies issue stock dividends instead of cash dividends to satisfy stockholders dividend expectations without spending cash and to increase the marketability of the corporations stock.
(c)
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BYP 14-5
COMMUNICATION ACTIVITY
Dear Mom and Dad, Thanks for calling me about your investments in Cormier Corporation and Fegan, Inc. The effect to you as stockholders is the same for both a stock dividend and a stock split. In each case, the number of shares you own will increase. Following the stock dividend, you will own 110 shares of Cormier [100 + (100 X 10%)]. After the stock split, you will own 200 shares of Fegan (100 X 2). The total value of your investments should remain approximately the same as before the stock dividend and stock split. The reason is that the market value per share will likely decrease in proportion to the additional shares that you will own. If there is a change in value, it is more likely to be higher than lower. The effects of the stock dividend and stock split on the corporations are limited entirely to the stockholders equity sections as follows: Stockholders Equity Item Total capital stock Par value per share Total paid-in capital Total retained earnings Total stockholders equity After Stock Dividend Increase No change Increase Decrease No change After Stock Split No change Decrease No change No change No change
I hope this answers your questions, Mom and Dad. If you have any additional questions, please give me a call. Love, P.S. Please send money.
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BYP 14-6
ETHICS CASE
(a) The stakeholders in this situation are: Tom Henson, president of Garcia Corporation. Andrea Lane, financial vice-president. The stockholders of Garcia Corporation. (b) There is nothing unethical in issuing a stock dividend. But the presidents order to write a press release convincing the stockholders that the stock dividend is just as good as a cash dividend is unethical. A stock dividend is not a cash dividend and does not necessarily place the stockholder in the same position. A stock dividend is a paper dividendthe issuance of a stock certificate, not a check (cash). (c) The stock dividend results in a decrease in retained earnings and an increase of the same amount in paid-in capital with no change in total stockholders equity. There is no change in total assets and no change in total liabilities and stockholders equity. As a stockholder, preference for a cash dividend versus a stock dividend is dependent upon ones investment objectiveincome (cash flow) or growth (reinvestment).
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