11- 1 income and changes in retained earnings chapter 12
TRANSCRIPT
11- 1
INCOME AND CHANGES IN RETAINED EARNINGS
Chapter
12
12-2
Information about net income can be divided into two major categories
Information about net income can be divided into two major categories
Income from continuing operations.
Income from continuing operations.
Reporting the Results of Reporting the Results of OperationsOperations
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This tax expense does not include effects of unusual, nonrecurring items.
This tax expense does not include effects of unusual, nonrecurring items.
These unusual, nonrecurring items are each reported net of taxes.
These unusual, nonrecurring items are each reported net of taxes.
12-4
When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the
income statement.
When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the
income statement.
Discontinued OperationsDiscontinued Operations
Discontinued Operations
Discontinued Operations
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A segment must be a separate line of business activity or an
operation that services a distinct category of customers.
A segment must be a separate line of business activity or an
operation that services a distinct category of customers.
Discontinued OperationsDiscontinued Operations
When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed
on the income statement.
When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed
on the income statement.
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During 2011, Matrix, Inc. sold an unprofitable segment of the company. The
segment had a net loss from operations during the period of $150,000 and a loss on
the sale of its assets of $100,000. Matrix reported income from continuing
operations of $1,750,000. All items are taxed at 30%.
How will this appear on the income statement?
During 2011, Matrix, Inc. sold an unprofitable segment of the company. The
segment had a net loss from operations during the period of $150,000 and a loss on
the sale of its assets of $100,000. Matrix reported income from continuing
operations of $1,750,000. All items are taxed at 30%.
How will this appear on the income statement?
Discontinued OperationsDiscontinued Operations
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Discontinued OperationsDiscontinued Operations
Loss on segment operations (150,000)$ Less: Tax benefits ($150,000 × 30%) 45,000 Net loss (105,000)$
Loss on disposal of assets (100,000)$ Less: Tax benefits ($100,000 × 30%) 30,000 Net loss (70,000)$
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Income Statement Presentation:
Discontinued OperationsDiscontinued Operations
Income from continuing operations 1,750,000$ Discontinued operations: Loss on operations (net of tax benefit of $45,000) (105,000) Loss on disposal of assets (net of tax benefits of $30,000) (70,000) Earnings before extraordinary item 1,575,000$
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Extraordinary ItemsExtraordinary Items
•Material in amount.
•Gains or losses that are both unusual in nature and not expected to recur in the foreseeable future.
•Reported net of related taxes.
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During 2011, Matrix, Inc. experienced a loss During 2011, Matrix, Inc. experienced a loss of $75,000 due to an earthquake at one of its of $75,000 due to an earthquake at one of its manufacturing plants in Chicago. This was manufacturing plants in Chicago. This was
considered an extraordinary item. The considered an extraordinary item. The company reported income before company reported income before
extraordinary item of $1,575,000. All gains extraordinary item of $1,575,000. All gains and losses are subject to a 30% tax rate.and losses are subject to a 30% tax rate.How would this item appear on the 2011 How would this item appear on the 2011
income statement?income statement?
During 2011, Matrix, Inc. experienced a loss During 2011, Matrix, Inc. experienced a loss of $75,000 due to an earthquake at one of its of $75,000 due to an earthquake at one of its manufacturing plants in Chicago. This was manufacturing plants in Chicago. This was
considered an extraordinary item. The considered an extraordinary item. The company reported income before company reported income before
extraordinary item of $1,575,000. All gains extraordinary item of $1,575,000. All gains and losses are subject to a 30% tax rate.and losses are subject to a 30% tax rate.How would this item appear on the 2011 How would this item appear on the 2011
income statement?income statement?
Extraordinary ItemsExtraordinary Items
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Earnings before extraordinary item 1,575,000$ Extraordinary Loss: Earthquake loss (net of tax benefit of $22,500) (52,500) Net income 1,522,500$
Income Statement Presentation:
Extraordinary ItemsExtraordinary Items
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A measure of the company’s profitability and earning power for the period.
A measure of the company’s profitability and earning power for the period.
Based on the number of shares issued and the length of time
that number remained unchanged.
Based on the number of shares issued and the length of time
that number remained unchanged.
Earnings Per Share (EPS)Earnings Per Share (EPS)
Earnings Per Share
=Net
Income ÷
Weighted Average Number of Shares Outstanding
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Remember that Matrix, Inc. has income from continuing operations of $1,750,000. The after-tax loss from discontinued operations
was $175,000 and the extraordinary loss was $52,500. Assume that Matrix has 156,250
weighted average shares outstanding.
Let’s prepare a partial income statement using all this information.
Remember that Matrix, Inc. has income from continuing operations of $1,750,000. The after-tax loss from discontinued operations
was $175,000 and the extraordinary loss was $52,500. Assume that Matrix has 156,250
weighted average shares outstanding.
Let’s prepare a partial income statement using all this information.
Earnings Per Share (EPS)Earnings Per Share (EPS)
12-14* Rounded.
Earnings Per Share (EPS)Earnings Per Share (EPS)
$1,750,000 ÷ 156,250$1,750,000 ÷ 156,250
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If preferred stock is present, subtract preferred dividends from net income prior to computing EPS.
If preferred stock is present, subtract preferred dividends from net income prior to computing EPS.
EPS is required to be reported in the income
statement.
EPS is required to be reported in the income
statement.
Earnings Per Share (EPS)Earnings Per Share (EPS)
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Declared by Board of Directors.
Declared by Board of Directors.
Not legally required.
Not legally required.
Creates liability at declaration.
Creates liability at declaration.
Requires sufficient Retained Earnings
and Cash.
Requires sufficient Retained Earnings
and Cash.
Cash DividendsCash Dividends
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Dividend DatesDividend DatesDate of Declaration
•Board of Directors declares the dividend.•Record a liability.
On March 1, 2011, the Board of Directors of Matrix, Inc. declares a $1.00 per share cash dividend on its
500,000 common shares outstanding. The dividend is payable to stockholders of record on April 1, and
paid on May 1.
On March 1, 2011, the Board of Directors of Matrix, Inc. declares a $1.00 per share cash dividend on its
500,000 common shares outstanding. The dividend is payable to stockholders of record on April 1, and
paid on May 1.
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Dividend DatesDividend Dates
Ex-Dividend Date•The day which serves as the ownership cut-off point for the receipt of the most recently declared dividend.
NO ENTRY
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Date of Record• Stockholders holding shares on this date
will receive the dividend. (No entry)
Date of Record• Stockholders holding shares on this date
will receive the dividend. (No entry)
Dividend DatesDividend Dates
X
April 2011
12-20
Date of Payment•Record the payment of the
dividend to stockholders.
Date of Payment•Record the payment of the
dividend to stockholders.
Dividend DatesDividend Dates
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On June 1, 2011, a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred
stock. The dividend will be paid on July 15. Which of the following will be included in the
July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
On June 1, 2011, a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred
stock. The dividend will be paid on July 15. Which of the following will be included in the
July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
Dividend DatesDividend Dates
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On June 1, 2011, a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred
stock. The dividend will be paid on July 15. Which of the following will be included in the
July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
On June 1, 2011, a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred
stock. The dividend will be paid on July 15. Which of the following will be included in the
July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
Dividend DatesDividend Dates$100 × 8% = $8 dividend per share$8 × 2,500 = $20,000 total dividend$100 × 8% = $8 dividend per share$8 × 2,500 = $20,000 total dividend
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All stockholders retain same percentage
ownership.
All stockholders retain same percentage
ownership.
No change in total stockholders’ equity.
No change in total stockholders’ equity.
No change in par values.
No change in par values.
Stock DividendsStock Dividends
Distribution of additional shares of stock to stockholders.
Distribution of additional shares of stock to stockholders.
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Entries to RecordEntries to RecordStock DividendsStock Dividends
In accounting for a small stock dividend (less than 20%), the market value of the new shares is transferred from Retained
Earning account to the paid-in capital accounts. This process is sometimes
called “capitalizing” retained earnings.
In accounting for a small stock dividend (less than 20%), the market value of the new shares is transferred from Retained
Earning account to the paid-in capital accounts. This process is sometimes
called “capitalizing” retained earnings.
On June 1, Aspen Corporation has outstanding 1,000,000 shares of $1 par value common stock with a market value of $25 per share. The company declares
a 5% stock dividend on this date. The dividend is distributable on July 15 to stockholders of record on
June 20. Let’s look at the journal entries.
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Entries to RecordEntries to RecordStock DividendsStock Dividends
Common shares outstainding 1,000,000 Stock dividend percent 5%Additional shares issuable 50,000 Market value per share 25$ Amount assigned to dividend 1,250,000$
Additional shares issuable 50,000 Par value per share 1$ Change in common stock account 50,000$
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Dividend DatesDividend DatesDate of Declaration
•Board of Directors declares the dividend.•Do not record a liability.
Date Description Debit Credit
Jun. 1 Retained Earnings 1,250,000 Stock Dividend to be Distributed 50,000 Additional Paid-in Capital: Stock Dividend 1,200,000
50,000 shares × $1 par value50,000 shares × $1 par value
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Dividend DatesDividend Dates
Ex-Dividend Date•The day which serves as the ownership cut-off point for the receipt of the most recently declared dividend.
NO ENTRY
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Date of Record• Stockholders holding shares on this date
will receive the dividend. (No entry)
Date of Record• Stockholders holding shares on this date
will receive the dividend. (No entry)
Dividend DatesDividend Dates
X
June 2011
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Date of Payment•Record the payment of the
dividend to stockholders.
Date of Payment•Record the payment of the
dividend to stockholders.
Dividend DatesDividend Dates
Date Description Debit Credit
Jul. 15 Stock Dividend to be Distributed 50,000 Common Stock 50,000
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Reasons for Stock Reasons for Stock DividendsDividendsManagement often finds stock
dividends appealing because they allow management to distribute something of perceived value to
stockholders while conserving cash which may be needed for other
purposes.
Management often finds stock dividends appealing because they allow management to distribute something of perceived value to
stockholders while conserving cash which may be needed for other
purposes.Stockholders like stock dividends
because they receive more shares, often the stock price does not fall
proportionately, and the dividend is not subject to income taxes (until the
shares received are sold).
Stockholders like stock dividends because they receive more shares, often the stock price does not fall
proportionately, and the dividend is not subject to income taxes (until the
shares received are sold).
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Distinction between Stock Distinction between Stock Splits and Stock DividendsSplits and Stock Dividends
The difference between a stock dividend and a stock split lies in the intent of management and the related issue of the size of the distribution. A stock dividend usually is intended to substitute for a cash dividend and is small enough that the market price of the stock is relatively unaffected.
Stock dividends do not result in a change in the par value of the stock. On the other hand, stock splits result in a pro rata reduction in the par value of the stock.
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Small Stock Dividend
Large Stock Dividend
Stock Splits
Total Stockholders'
EquityNo Effect No Effect No Effect
Common Stock Increases Increases No EffectPaid-in Capital Increases No Effect No Effect
Retained Earnings Decreases Decreases No Effect
Number of Shares Outstanding
Increases Increases Increases
Par Value per Share
No Effect No Effect Decreases
Small Stock Dividend
Large Stock Dividend
Stock Splits
Total Stockholders'
EquityNo Effect No Effect No Effect
Common Stock Increases Increases No EffectPaid-in Capital Increases No Effect No Effect
Retained Earnings Decreases Decreases No Effect
Number of Shares Outstanding
Increases Increases Increases
Par Value per Share
No Effect No Effect Decreases
Summary of Effects of Summary of Effects of Stock Dividends and Stock Stock Dividends and Stock SplitsSplits
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Adjust retained earnings
retroactively.
Adjust retained earnings
retroactively.
The adjustment should be
disclosed net of any taxes.
The adjustment should be
disclosed net of any taxes.
The correction of an error identified as affecting net income in a prior period.
The correction of an error identified as affecting net income in a prior period.
Prior Period AdjustmentsPrior Period Adjustments
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Statement of Retained Statement of Retained Earnings with Prior Period Earnings with Prior Period AdjustmentAdjustment
12-35
Restrictions of Retained Restrictions of Retained EarningsEarnings
If I loan your company $1,000,000, I will want you to restrict your
retained earnings in order to limit dividend payments.
Loan agreements can include restrictions on paying dividends below a certain
amount of retained earnings.
Loan agreements can include restrictions on paying dividends below a certain
amount of retained earnings.
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Issuance of new shares of
stock.
Issuance of new shares of
stock.
Net Income or Net Loss
Net Income or Net Loss
Payment of Dividends
Payment of Dividends
GAAP excludessome unrealized items from income, such as the change in market value of available-for-sale debt
and equity investments.
GAAP excludessome unrealized items from income, such as the change in market value of available-for-sale debt
and equity investments.
Comprehensive IncomeComprehensive Income
Normally, there are 3 ways that financial position can change.
Normally, there are 3 ways that financial position can change.
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Comprehensive IncomeComprehensive IncomeGAAP requires that unrealized items that are
normally reported on the balance sheet be added back to compute “Comprehensive Income.”
GAAP requires that unrealized items that are normally reported on the balance sheet be added
back to compute “Comprehensive Income.”
12-38
Statement of Stockholders’ Statement of Stockholders’ EquityEquity
This is a more inclusive statement thanthe statement of retained earnings.
This is a more inclusive statement thanthe statement of retained earnings.
12-39
Stockholders’ Equity Stockholders’ Equity Section of the Balance Section of the Balance SheetSheet
12-40
End of Chapter 12End of Chapter 12