Download CHAPTER 16

CHAPTER 16
STOCKHOLDERS’ EQUITY: RETAINED EARNINGS
Read pages 811-833 and answer the following questions.
1. What is the basic source of Retained Earnings?
2. What are the major types of events/items that affect Retained Earnings? See
Illustration 16-1.
3. Why don’t companies pay out all of their retained earnings as dividends?
4. What types of dividends do companies distribute? Briefly describe each.
1
Example 1
5. On September 12, 2001, the Nickell Corporation’s Board of Directors voted to
declare a $.50 per share cash dividend on common stock payable October 15 to
stockholders of record on September 30.
a. What is the date of declaration?
b. What is the date of record?
c. What is the date of payment?
6. Assume the Nickell Corporation has 1,000,000 shares of common stock
authorized, 500,000 shares issued and 480,000 shares outstanding. Give all the
journal entries related to the dividend declared in #5 above.
Example 2
7. Assume instead that the Nickell Corporation declared a property dividend. Each
share of common stock will receive one share of stock in the Ringer Corporation.
The Nickell Corporation paid $15 per share for the stock and it is currently worth
$20 per share. Record the declaration of the dividend and the payment of the
dividend.
2
Example 3
8. The Toman Corporation would like to pay a cash dividend to its stockholders but
does not have cash available currently. The corporation has decided to issue a $1
per share scrip dividend to its 100,000 shares of outstanding common stock. The
date of declaration is September 1, 2001. The date of payment is September 1,
2002 and the scrip bears interest at 6%. Record the declaration of the dividend,
the accrual of interest at December 31, 2001 (assume 4 months) and the payment
of the dividend on September 1, 2002.
9. Why do companies issue stock dividends?
10. Why do companies split their stock?
3
Example 4
11. The Brandt Corporation wants to double the number of shares of common stock it
has outstanding. It can do this through a 2-for-1 stock split or a 100% stock
dividend. The company has 200,000 shares of $2 par common stock outstanding.
a. How would this affect the selling price of the stock? Is your answer the
same for both a stock split and a stock dividend?
b. How would a stock split affect the par value per share of the stock?
c. What would the total legal capital be after the stock split?
d. How would the stock split affect the retained earnings?
e. What journal entry is used to record a stock split?
f. How would a 100% stock dividend affect the par value per share of the
stock?
g. What would the total legal capital be after the stock dividend?
h. How would the stock dividend affect retained earnings?
i. Give the journal entry to record the stock dividend if the stock is selling
for $100 per share when the dividend is declared.
j. What factors might influence whether the company chooses a stock split
or a stock dividend to double the shares?
4
Example 5
12. The Conley Company has 100,000 shares of $1 par common stock outstanding.
The stock is currently selling for $25 per share. The company declares a 10%
stock dividend on September 19, 2001 distributable on October 19 to stockholders
of record on October 5. Prepare the journal entries related to this stock dividend.
Example 6
13. The Conover Company has 100,000 shares of $1 par common and 1,000 shares of
$50 par preferred stock outstanding. The preferred stock has a 6% dividend rate
and is cumulative. The Conover Company wants to declare dividends totaling
$12,000. Determine how much will be paid to preferred stockholders and how
much to common, assuming
a. The company has not paid dividends in the two years prior to the current
year.
b. The preferred stock is participating up to 8% and there are no dividends in
arrears.
14. What is an appropriation of retained earnings? Why do companies appropriate
retained earnings?
5
15. What are the three categories that normally appear on a statement of stockholders’
equity? (Actually, there is a fourth category not mentioned. That is Accumulated
Other Comprehensive Income. Three items that normally appear in Accumulated
OCI are foreign currency translation gains and losses (ACC 435); minimum
pension liability (Ch 21) and unrealized gains/losses on AFS investments (Ch
18)).
16. What does the rate of return on common stock equity measure? What is the
formula? Is a higher % better than a lower %?
17. What does the payout ratio measure? What is the formula? How do you interpret
this ratio (that is, how do you decide whether the ratio is good or bad)?
18. What is the formula for the price earnings ratio? What information does this ratio
give to investors?
19. What is the formula for the book value per share? What information does this
ratio give to investors/analysts?
6
Account Title
Dr/Cr
Classification
Cash Dividends Declared
Or Cash Dividends
Dividends Payable
Debit
Contra equity
Credit
Current liability
Property Dividends
Declared
Debit
Contra equity
Property Dividends
Payable
Scrip Dividends Declared
Credit
Current liability
Debit
Contra equity
Notes Payable to
Stockholders
Stock Dividend Declared
Credit
Debit
Current or longterm liability
Contra equity
Common Stock
Distributable
Retained Earnings
Appropriated for …..
Credit
Legal capital
Credit
Retained
Earnings
What does the balance in the account
represent?
A temporary account used to record the
amount of cash dividends declared.
Amount of cash dividends declared but
not yet paid.
A temporary account used to record the
fair market value of property dividends
declared.
Amount of property dividends declared
but not yet paid.
A temporary account used to record the
amount of scrip dividends declared.
Amount of scrip dividends declared but
not yet paid.
A temporary account used to record the
total contributed capital assigned to shares
of stock to be issued as a dividend.
The par or stated value of the shares of
stock to be issued as a dividend.
The amount of retained earnings that are
not available for the declaration of
dividends due to ………
7