Corporations_ Retained Earnings and the Income Statement

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					 Corporations: Effects on Retained
Earnings and the Income Statement

Chapter 13




 1
Stock Dividend
 A distribution of a corporation’s own stock
      Affects only stockholders’ equity accounts
        No effect on total stockholders’ equity
        No effect on assets or liabilities
 Stockholders receive proportionate shares
      Example–10% stock dividend; every stockholder
      receives 10% of shares distributed
        Total number of shares issued and outstanding increases
        Ownership percentages remain the same




  2
Why Do Companies Issue Stock
Dividends?
  Conserve cash
       Continue dividends without using cash
  Reduce market price per share
       Share supply increases; market price decreases
       Less expensive; more attractive investment
  Reward investors
       Shareholders receive something of value


   3
Entries for Stock Dividend
 Same three dates for a stock dividend
  Declaration date; record date; distribution date
 Small stock dividend
  Distribution is less than 20 to 25% of issued shares
  Debit(Reduce) Retained earnings for market value of
  shares to be distributed
  Credit (Increase)Common stock for the par value of the
  stock and
  Credit (Increase)Paid-in capital (if applicable) for excess of
  par—common
 Total Stockholders Equity does not change


   4
•Equity after 5% Common Stock Dividend




     5
  Entries for Stock Dividend (Continued)
   Large
     Distribution is greater than 20% to 25% of issued shares
     Debit (Reduce) Retained earnings for par or stated value
     of shares
     Credit (Increase) Common stock for par or stated value
     of shares
     Rare
   Total Stockholders Equity does not change
•Assume a second stock dividend of 50%
•An additional 1,050,000 shares will be issued (2,100,000 x 50%)
•Total shares issued will be 3,1050,000 shares
 (2,100,000 + 1,050,000)



      6
Stockholders’ Equity Presentation




 Equity after 50% Common Stock Dividend




   7
               S13-2: COMPARING AND CONTRASTING CASH AND
                          STOCK DIVIDENDS

Compare and contrast the accounting for cash dividends and stock
dividends.
1. In the space provided, insert either “Cash
   dividends,” “Stock dividends,” or “Both cash
   dividends and stock dividends” to complete each of
   the following statements:

      Both cash dividends
a.    and stock dividends
     ________________decrease         Retained earnings.
          Stock dividends
b. ________________ has(have) no effect on a
liability.
      8
        S13-2: COMPARING AND CONTRASTING CASH AND STOCK D


(Continued)



     Stock dividends
c. ________________ increase Paid-in capital by the
same amount that they decrease Retained earnings.

      Cash dividends
d. ________________ decrease both total assets and
total stockholders’ equity, resulting in a decrease in
the size of the company.


    9
               S13-3: ACCOUNTING FOR A STOCK DIVIDEND



Yummy, Inc., had 310,000 shares of $1 par common stock issued
and outstanding as of December 1, 2012. The company is authorized
to issue 1,400,000 common shares. On December 15, 2012, Yummy
declared and distributed a 5% stock dividend when the market value
for Yummy’s common stock was $3.

Requirements:
1. Journalize the stock dividend.
2. How many shares of common stock are outstanding
after the dividend?


     10
                  S13-3: ACCOUNTING FOR A STOCK DIVIDEND



 1. Journalize the stock dividend.
                             Journal Entry
DATE                     ACCOUNTS                    DEBIT    CREDIT
Dec 15    Retained earnings   15,500 x $3            46,500
                 Common stock                                  15,500
                 Paid in capital in excess of par-             31,000
                 common
 2. How many shares of common stock are outstanding
 after the dividend?
     310,000 +15,500 (310,000 x 5%)= 325,500
     11
Stock Splits
 A stock split:
       Cuts par value per share
       Increases the number of shares of stock issued and
       outstanding
       Leaves all account balances and total stockholders’
       equity unchanged
 Balances in the accounts are unchanged
 Record in a memorandum entry–a journal entry
 without debits and credits



  12
Stock Split Example (2 for 1)
 Before split




                            After split


  13
Effects of Dividends and Stock
Splits
   Stock dividends and stock splits have similarities and
   differences
                         Paid-in                  Total
              Common                Retained
   Event                capital in           stockholders
                stock               earnings
                      excess of par             ’ equity
Cash
              No effect   No effect   Decrease    Decrease
dividend
Stock
              Increase    Increase    Decrease    No effect
dividend

Stock split   No effect   No effect   No effect   No effect

     14
                   S13-5: ACCOUNTING FOR A STOCK SPLIT

Decorator Plus Imports recently reported the following
stockholders’ equity (adapted except par value per share):




Suppose Decorator Plus split its common stock 2 for 1 in order to
decrease the market price per share of its stock. The company’s
stock was trading at $20 per share immediately before the split.
     15
                 S13-5: ACCOUNTING FOR A STOCK SPLIT

1. Prepare the stockholders’ equity section of Decorator
Plus Imports’ balance sheet after the stock split.

Paid-in capital:
Common stock, $0.50 par, 480,000,000 shares
authorized, 228,000,000 shares issued         $ 114,000,000
Paid-in capital in excess of par                140,000,000
Total paid-in capital                         $ 254,000,000
Retained earnings                               650,000,000
Total stockholders’ equity                    $ 904,000,000




    16
                  S13-5: ACCOUNTING FOR A STOCK SPLIT

2. Were the account balances changed or unchanged after
the stock split?
Paid-in capital:
Common stock, $0.50 par, 480,000,000 shares
authorized, 228,000,000 shares issued Unchanged   $ 114,000,000
Paid-in capital in excess of par      Unchanged     140,000,000
Total paid-in capital                             $ 254,000,000
Retained earnings                     Unchanged     650,000,000
Total stockholders’ equity            Unchanged   $ 904,000,000




     17
Treasury Stock
 Shares that a company has issued and later
 reacquired
 Reasons corporations purchase their own stock:
       To increase net assets by buying low and selling
       high
       To support the company’s stock price
       To avoid a takeover by an outside party
       To reward valued employees with stock
 A common practice among corporations


  18
Accounting for Treasury Stock
   Contra equity account
         Debit balance
   Recorded at cost (not par)
   Reported beneath Retained earnings on the
   balance sheet
         Reduction to total stockholders’ equity
   Decreases outstanding shares
         Not eligible for dividends
         Not eligible to vote

Issued stock – Treasury stock = Outstanding stock
    19
Treasury Stock transactions




  20
Treasury Stock Journal Entries
 Purchase of treasury stock
       Company debits Treasury stock and credits Cash




  21
Treasury Stock Journal Entries
  Sale of treasury stock at cost




  22
Treasury Stock Journal Entries
 Sale of treasury stock above cost
       Difference is credited to Paid-in capital from
       treasury stock transactions




  23
Treasury Stock Journal Entries




  24
Treasury Stock Journal Entries
Sale of treasury stock below cost
   Difference is debited to Paid-in Capital from
   treasury stock transactions, if available
   Otherwise debit Retained earnings




  25
Treasury Stock Journal Entries




  26
Treasury Stock Journal Entries
 Sale of treasury stock below cost
       Paid-in capital from treasury stock transactions is
       insufficient to cover shortfall
       Debit Retained earnings for the difference




  27
Treasury Stock Journal Entries




  28
Treasury Stock and Stockholders'
Equity
 Reported beneath Retained earnings as a
 reduction




        Authorized shares - 20,000,000
        Issued shares     - 6,300,000
        Outstanding shares - 6,299,700
   29
     Treasury Stock
30
          S13-6: ACCOUNTING FOR THE PURCHASE AND SALE OF TRE


Discount Center Furniture, Inc., completed the following treasury
stock transactions:
a. Purchased 1,400 shares of the company’s $1 par common stock
    as treasury stock, paying cash of $5 per share.
b. Sold 400 shares of the treasury stock for cash of $8 per share.

Requirements
1. Journalize these transactions. Explanations are not required.

2. Show how Discount Center will report treasury stock on its
   December 31, 2012 balance sheet after completing the two
   transactions. In reporting the treasury stock, report only on
   the Treasury stock account.
     31
          S13-6: ACCOUNTING FOR THE PURCHASE AND SALE OF TRE


1. Journalize these transactions. Explanations are not required.
                           Journal Entry
 DATE                  ACCOUNTS                  DEBIT     CREDIT
  a.  Treasury stock                               7,000
              Common stock                                    7,000




                           Journal Entry
 DATE                  ACCOUNTS                  DEBIT     CREDIT
  b.  Cash                                         3,200
                 Treasury stock                               2,000
                 Paid-in capital from treasury
                                                              1,200
                 stock transaction
     32
           S13-6: ACCOUNTING FOR THE PURCHASE AND SALE OF TRE


 2. Show how Discount Center will report treasury stock on its
December 31, 2012 balance sheet after completing the two
transactions. In reporting the treasury stock, report only on the
Treasury stock account.

Stockholders’ equity
   Treasury stock 1,000 shares at cost                     5,000




      33
Restrictions on Retained Earnings
  Restrictions
        Requirement by lenders to maintain a minimum
        level of equity by limiting:
          Cash dividend payments
          Treasury stock purchases
        Reported in the notes to the financial statements
  Appropriations
        Restrictions on retained earnings recorded by formal
        journal entries
        Board of directors may designate purpose of
        appropriation
        Segregate in a separate account
          A portion of retained earnings for a specific use
   34
Stockholders’ Equity with
Appropriations capital does not appear
  The heading Paid-in
  All additional paid-in capital accounts are combined




    35
The Corporate Income Statement
 More complex with unique items
 Public corporations must publish financial
 statements
 Sections
       Continuing Operations
       Special Items
       Earnings Per Share
 Details important to investors


  36
The Corporate Income Statement
 Continuing Operations
         Should continue from period to period
         Useful for making projections about future earnings




 Unique items
    Gain on sales of machinery–other
          Not core to the business
        Income tax expense
          Subtracted to arrive at income from continuing operations
   37
Special Items
 Reported after income from continuing
 operations
 Two distinctly different gains and losses:
       Discontinued operations
       Extraordinary items




  38
Discontinued Operations
 Segment of a business that has been sold
       Each segment is an identifiable division of company
 Reported separately because the segment will
 not be around in the future
 Shown net of tax
       Gain - income tax expense = Gain, net of tax
       Loss - income tax savings = Loss, net of tax




  39
Extraordinary Items
 Extraordinary gains and losses
 Both unusual and infrequent
 Not expected to recur in the foreseeable future
 Examples:
       Losses from natural disasters
       Foreign government takeover (expropriation)
 Reported net of income tax effect
 Items not qualifying as extraordinary
       Gains and losses on the sale of plant assets
       Losses due to lawsuits
       Losses due to employee labor strikes
       Natural disasters that occur frequently in the area
  40
Earnings per Share (EPS)
 Most widely used business statistic
 Measures amount of net income for each share of
 common stock outstanding
    Issued stock – treasury stock = outstanding shares
 Key measure of success in business
 Separate EPS figure for each element of income
       Income from continuing operations
       Income from discontinued operations
       Income before extraordinary item
       Extraordinary gain or loss
       Net income

  41
Earnings per Share (EPS)
 Calculation




 Preferred dividends also affect EPS

  42
EPS and Preferred Stock
   Preferred dividends must be subtracted from
   income to compute EPS
          Preferred dividends are paid first
          Common will get what is left




* Assume the annual preferred dividend would be $10,000
  (10,000 shares X $1.00 dividend per share)
     43
                            E13-20: COMPUTING EPS

Altar, Corp., earned net income of $118,000 for 2012. Altar’s books
include the following figures:

Preferred stock, 3%, $50 par, 1,000 shares
issued and outstanding . . . . . . . . . . . . . . . . . . . . . $ 50,000
Common stock, $2 par, 53,000 issued . . . . . . . . . . 106,000
Paid-in capital in excess of par—common . . . . . . 460,000
Treasury stock, common, 1,200 at cost . . . . . . . . . . 24,000

1. Compute Altar’s EPS for the year.




   $(118,000 – 15,000)/51,800 = $2.25*
      44
                            (2.249034749034749) rounded
Statement of Retained Earnings
 Reports how retained earnings changed over the
 accounting period




 Corporate dividends appear where drawings
 would appear in proprietorships or partnerships
  45
Prior-Period Adjustments
 Corrections for errors of an earlier period
 Due to the closing of accounts, the error is held in Retained
 earnings
 Correction called prior-period adjustment
 Correcting entry includes:
     Debit or credit to Retained earnings for error amount
     Debit or credit to asset or liability account that was misstated
 Reported on statement of retained earnings




  46

				
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