Statement of Retained Earnings Retained Earnings Treasury Stock

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					Retained Earnings,
Treasury Stock, and
the Income Statement
Chapter 14
Retained Earnings
   Accumulates income that has been retained in
    the business (that is, not paid out in dividends to
    stockholders) over life of business.
   All net income minus net losses minus
    dividends
   Negative balance in Retained Earnings - deficit
   Not a fund of cash
Objective 1
Account for stock dividends.
Stock Dividend
 Proportional distribution of corporation’s
  own stock to shareholders (10%)
 Does not change total stockholders’ equity
 Transfer of retained earnings to
  contributed capital
Entries for Stock Dividend
Small                     Large
 Distribution is < 25%    Distribution is > 25% of
  of previously             previously outstanding
  outstanding shares.       shares.
 Debit retained           Debit retained earnings
  earnings for market       for par or stated value
  value of shares to be     of shares.
  distributed
Small Stock Dividend Example
San Diego Company, with 300,000 shares
 of $2 par value common stock
 outstanding, declares a 15% stock
 dividend when the shares are trading at
 $20.
Small Stock Dividend Example
How much stock do the shareholders
  receive?
 300,000 × 15% = 45,000 shares
  Small Stock Dividend Example
                          General Journal
 Date       Accounts and Explanations     PR   Debit     Credit
Dec 31 Retained Earnings                       900,000
          Common stock                                    90,000
          Paid in capital in excess of par,
          common                                         810,000
        15% stock dividend distributed

             USE MARKET VALUE
                   USE PAR
               stock shares x $20
        Common45,000 = 45,000 shares x $2
Large Stock Dividend Example
San Diego Company, with 300,000 shares
 of $2 par value common stock
 outstanding, declares a 40% stock
 dividend when the shares are trading at
 $20.
Large Stock Dividend Example
 How much stock do the shareholders
  receive?
 300,000 × 40% = 120,000 shares
  Large Stock Dividend Example

                          General Journal
 Date       Accounts and Explanations     PR   Debit     Credit
Dec 31 Retained Earnings                       240,000
          Common stock                                   240,000
        40% stock dividend distributed


                        USE PAR
                   120,000 shares x $2
Stock Split Example
San Diego Company had 500,000 shares of $10
  par common stock authorized and 100,000
  issued. A 5-for-1 stock split was declared.
 After the split, how many shares are
 Authorized? 500,000 x 5 = 2,500,000
 Issued? 100,000 x 5 = 500,000
 What is the par value per share? $10 ÷ 5 = $2


      Why do companies perform Stock Splits???
 Stock split
    No formal entry is made, but a memo entry
     is prepared in the journal.
                          General Journal
 Date        Accounts and Explanations       PR   Debit   Credit
Dec 31 Memo: Called in the outstanding $10
       par common stock and distributed 5
       shares of $2 par ($10/5) common
       stock for each old share. Now
       500,000 shares are outstanding.
Objective 2
Distinguish stock splits from stock dividends.
Similarities Between Stock
Splits and Stock Dividends
 Both increase number of shares of stock
  owned per stockholder.
 Neither type of income creates taxable
  income for investor.
Differences Between Stock
Splits and Stock Dividends
Stock Dividend:          Stock Split:
 shifts amounts from     affects no account
  retained earnings to     balance.
  paid-in capital.        Changes par value
 par value per share     Increases number of
  remains unchanged.       shares of stock
                           authorized, issued,
                           and outstanding.
Objective 3
Account for treasury stock.
Treasury Stock...
 Shares that a company has issued and
  later reacquired
 Purchasing treasury stock decreases
  assets and stockholders’ equity
 Purchasing Treasury Stock
 On May, 8, 2002, Whitt, Inc. purchased
  2,000 of its own shares of stock in the
  open market for $8,000.
                         General Journal
Date        Accounts and Explanations      PR   Debit   Credit
May 8   Treasury stock, common                  8,000
             Cash                                       8,000



   Keep track of the cost per share: $8,000 / 2,000 = $4
 Selling Treasury Stock at Cost
  On June 30, 2002, Whitt sold 100 shares of
       its treasury stock for $4 per share.
                        General Journal
 Date      Accounts and Explanations      PR   Debit   Credit
Jun 30 Cash                                     400
          Treasury stock, common                          400
  Selling Above Cost
  On July 19, Whitt sold an additional 500
   shares of its treasury stock for $8 per
   share.
                          General Journal
 Date        Accounts and Explanations         PR   Debit    Credit
Jul 19   Cash                                        4,000
              Treasury stock, common                         2,000
              Paid in capital-treasury stock                 2,000
                 500 X $4 original cost
  Selling Below Cost
  On August 27, Whitt sold an additional 400
   shares of its treasury stock for $1.50 per
   share.
                           General Journal
 Date         Accounts and Explanations      PR   Debit    Credit
Aug 27   Cash                                        600
         Paid in capital – treasury stock          1,000
             Treasury stock, common                         1,600

              400 X $4 original cost
Retirement of Stock...
 Decreases outstanding stock
 Retired shares cannot be reissued
 There is no gain or loss on retirement
Objective 4
Report restrictions on retained earnings.
Restrictions on Retained
Earnings
 Reported in notes to financial statements
 Appropriations are restrictions on retained
  earnings that are recorded by formal
  journal entries
Objective 5
Analyze a complex income statement.
Reporting Income Information
 Should help to predict how the company
  will perform in the future
 Items that are material in amount, but are
  not typical of regular operations, reported
  separately from continuing operations
 See page 555
Income from continuing operations

 Measures profitability of the ongoing
  operations
 Useful for making projections about future
  earnings
Special Items
   Reported after income from continuing
    operations
     Discontinued operations
     Extraordinary gains and losses
     Cumulative effect of an accounting change –
      NO LONGER REPORTED ON THE INCOME
      STATEMENT!!!
 Discontinued Segment
 Segments of a business that have been sold
 Two parts reported in this section
     Income  or loss from operations of business from
      beginning of year to date of disposal
     Gain or loss on disposal of the assets of the
      segment
     Reported net of the income tax effect
Extraordinary Items
   Both unusual and infrequent.
     Unusual  in nature – abnormal and only
      incidentally related to customary activities
     Infrequent in occurrence – not reasonably
      expected to happen in the foreseeable future
 Reported net of their tax effect.
 Accounting rules specify extraordinary
  items.
Extraordinary Items
 Extraordinary items include expropriations.
 May include losses due to natural disasters.
     hurricane
     flood
     fire
Changes in Accounting
Methods
 Adoption of a newly required accounting
  standard
 Changing accounting methods
 Per FASB, it is now recorded as a “Prior
  Period Adjustment,” adjusting the retained
  earnings balance.
Earnings Per Share

    Net income - Preferred dividends
Weighted-average common shares outstanding
Earnings Per Share Example
 On January 1, San Diego Company had
  100,000 common shares outstanding.
 On April 1, the company purchased
  15,000 treasury shares.
 On September 1, they issued 50,000 new
  shares.
 Income for the year was $135,000.
 What are the earnings per share?
Earnings Per Share Example

No. of Shares   Fraction     Weighted
Outstanding     of Year      Average
 100,000 ×      3/12     =    25,000
  85,000 ×      5/12     =    35,417
 135,000 ×      4/12     =    45,000
 Total                       105,417


   EPS = $135,000 ÷ 105,417 = $1.28
Earnings Per Share and
Preferred Stock
 Subtract preferred dividends from income
  subtotals (income from continuing
  operations, income before extraordinary
  items, and net income) in computation of
  EPS
 Preferred dividends are not subtracted
  from income or loss from discontinued
  operations, or from extraordinary gains or
  losses
Earnings Per Share
and Preferred Stock
Corporations with complex capital structures
  present two sets of EPS amounts.
 EPS based on outstanding common
  shares (basic EPS)
 EPS based on outstanding common
  shares plus the number of additional
  common shares that would arise from
  conversion of the preferred stock
Prior Period Adjustments...
Corrections to beginning balance of
  Retained Earnings for errors of an earlier
  period.
 Correcting entry includes a debit or credit
  to Retained Earnings for error amount.
 Also includes debit or credit to the asset or
  liability account that was misstated.
Statement of Retained Earnings
   See page 559
Objective 6
Prepare a Statement of Stockholders’
  Equity.
Statement of
Stockholders’ Equity
 More comprehensive than statement of
  retained earnings
 Reports changes in all categories of equity
Statement of Stockholders’
Equity
   See page 560

				
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