Retained Earnings, Treasury Stock, and the Income Statement Chapter 14 Retained Earnings and Dividends • Retained Earnings shows the amount of income allowed to accumulate from the beginning of the corporation’s life to the present. • Retained Earnings represents a claim on assets, but it is not cash. Retained Earnings and Dividends • The balance in the Income Summary account is closed to Retained Earnings at period end. • Dividends are distributions to the stockholders. • To declare dividends there must be adequate retained earnings. Objective 1 Account for Stock Dividends. Stock Dividends • What are stock dividends? • They are a proportional distribution of a corporation’s own stock to shareholders. • They do not change total stockholders’ equity. • A stock dividend is a transfer of retained earnings to contributed capital. Small Stock Dividend Example • The dividend is valued at the product of the number of shares distributed times the market price at declaration date. • 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 • 45,000 at $20 per share = $900,000, and 45,000 at $2 per share = $90,000 What is the entry when the dividend is distributed? Small Stock Dividend Example Retained Earnings 900,000 Common Stock 90,000 Paid-in Capital in Excess of Par 810,000 15% common stock dividend distributed Stock Split • This is an increase in the number of authorized, issued, and outstanding shares. • It is a reduction in the par value. • The market value is usually affected proportionately. Stock Split • A 5-for-1 stock split means that the company would have five times as many shares outstanding after the split as it had before. • Each share’s par value would be divided by five. [...]... labeled Objective 5 Analyze a Complex Income Statement The Corporate Income Statement (Continuing Operations) Allied Corporation Income Statement Year Ended December 31, 20xx Net sales revenue Cost of goods sold Gross profit Operating expenses Operating income $500,000 240,000 260,000 181,000 79,000 The Corporate Income Statement (Continuing Operations) Operating income Other gains (losses): Loss on restructuring... machinery Income from continuing operations before income tax Income tax expense Income from continuing operations 79,000 10,000 21,000 90,000 36,000 54,000 The Corporate Income Statement (Special Items) Discontinued operations income of $35,000, less income tax of $14,000 Income before extraordinary item and cumulative effect of change in depreciation method Extraordinary flood loss, $20,000, less income. .. change in depreciation method Net income $2.70 1.05 3.75 –0.60 0.30 $3.45 Analyzing the Corporate Income Statement • Extraordinary items are both unusual and infrequent • They are reported net of their tax effect • The environment must be considered when determining whether an item is unusual • Accounting rules specify extraordinary items Analyzing the Corporate Income Statement • Extraordinary items... authorized and 100,000 issued • After the split, 2,500,000 are authorized • 500,000 are issued • What is the par value per share? • $10 ÷ 5 = $2 Objective 2 Distinguish Stock Splits from Stock Dividends Similarities Between Stock Splits and Stock Dividends Both increase the number of shares of stock owned per stockholder Neither change the investor’s cost of the stock they own Neither type of income creates... Cumulative effect of change in depreciation method, $10,000, less income tax of $4,000 Net income 21,000 75,000 –12,000 6,000 $69,000 The Corporate Income Statement (Earningsstock Share) per Earnings per share of common (20,000 shares outstanding): Income from continuing operations Income from discontinued operations Income before extraordinary item and cumulative effect of change in depreciation method Extraordinary... income creates taxable income for the investor Differences Between Stock Splits and Stock Dividends • A stock dividend shifts an amount from retained earnings to paid-in capital • The par value per share remains unchanged • A stock split affects no account balance • It changes the par value of the stock • It increases the number of shares of stock authorized, issued, and outstanding Objective 3 Account... Example • What if the resale price is less than cost? • Debit Paid-in Capital from Treasury Stock Transactions • Debit Retained Earnings if the Paid-in Capital from Treasury Stock Transactions is too small Retirement of Stock …decreases the outstanding stock of the corporation • Retired shares cannot be reissued • There is no gain or loss on retirement Objective 4 Report Restrictions on Retained Earnings... Earnings Restrictions on Retained Earnings • Restrictions are reported on the notes to the financial statements • Appropriations are restrictions on retained earnings that are recorded by formal journal entries • Retained earnings appropriations are rare • There are many acceptable variations in format for presenting stockholders’ equity Variations in Reporting Stockholders’ Equity 1 The heading Paid-in... expropriations • Also, they include losses due to natural disasters • hurricane • flood • fire Analyzing the Corporate Income Statement • Changes in accounting methods can result from either of two scenarios: 1 Adoption of a newly required accounting standard 2 Changing accounting methods Earnings Per Share Example • On January 1, San Diego Company had 100,000 common shares outstanding • On May 1, the company... Per Share Example • On January 1, San Diego Company had 100,000 common shares outstanding • On May 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? . Retained Earnings, Treasury Stock, and the Income Statement Chapter 14 Retained Earnings and Dividends • Retained Earnings shows the amount of income allowed to accumulate from the beginning. Stock Splits and Stock Dividends Both increase the number of shares of stock owned per stockholder. Neither change the investor’s cost of the stock they own. Neither type of income creates taxable income. beginning of the corporation’s life to the present. • Retained Earnings represents a claim on assets, but it is not cash. Retained Earnings and Dividends • The balance in the Income Summary