earnings per share and retained earnings c hapter 17 copyright © 2010 south-western/cengage...
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Earnings per Share and
Retained Earnings
Chapter 17
COPYRIGHT © 2010 South-Western/Cengage Learning
Intermediate AccountingIntermediate Accounting 11th edition 11th edition
Nikolai Bazley JonesNikolai Bazley Jones
An electronic presentationAn electronic presentationBy Norman SundermanBy Norman Sundermanand Kenneth Buchananand Kenneth BuchananAngelo State University
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1. Compute basic earnings per share (EPS).
2. Understand how to compute the weighted average common shares for EPS.
3. Identify the potential common shares included in diluted EPS.
4. Apply the treasury stock method for including share options and warrants in diluted EPS.
5. Calculate the impact of a convertible security on EPS.
Objectives
3
6. Compute diluted EPS.
7. Record the declaration and payment of cash dividends.
8. Account for a property dividend.
9. Explain the difference in accounting for small and large dividends.
10. Understand how to report accumulated other comprehensive income.
11. Prepare a statement of changes in stockholders’ equity.
Objectives
4
Earnings per Share
While earnings per share (EPS) is one of the most-watched numbers in
corporate America, the ability of a company to earn a profit does not
always translate to the ability to pay a large dividend.
While earnings per share (EPS) is one of the most-watched numbers in
corporate America, the ability of a company to earn a profit does not
always translate to the ability to pay a large dividend.
5
Earnings per Share
For example, Microsoft chose to reinvest its earnings to fuel future
growth until 2003. Eventually, Microsoft grew to a point where it
could no longer sustain the growth rate and then it began paying dividends.
For example, Microsoft chose to reinvest its earnings to fuel future
growth until 2003. Eventually, Microsoft grew to a point where it
could no longer sustain the growth rate and then it began paying dividends.
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A corporation summarizes the components of its net income on its income statement, which are:– Income (loss) from continuing operations– Results from discontinued operations– Extraordinary gains or losses
A corporation also reports its earnings per share on its income statement.
Earnings and Earnings per Share
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For computing earnings per share, there are two types of corporate capital structures—simple and complex.
A simple capital structure is one that consists only of common stock outstanding.
A corporation with a simple capital structure is required to report basic earnings per share.
Simple Capital Structure
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Net Income – Preferred Dividends
Weighted Average Number of Common Shares Outstanding
Basic Earnings per Share
$48,000 – $8,000
16,000= $2.50
Disregard common stock dividends in calculating EPS.
Disregard common stock dividends in calculating EPS.
Lapan Corporation reports net income of $48,000, and declares and pays dividends of $8,000 on its
preferred stock. It also declares and pays dividends of $12,000 on its 16,000 shares of
common stock.
Lapan Corporation reports net income of $48,000, and declares and pays dividends of $8,000 on its
preferred stock. It also declares and pays dividends of $12,000 on its 16,000 shares of
common stock.
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Since a corporation earns its net income over the entire year, the
earnings relate to the common shares outstanding during the year.
Since a corporation earns its net income over the entire year, the
earnings relate to the common shares outstanding during the year.
Weighted Average Shares
10
McTeal Corporation had 12,000 shares of common stock outstanding at the beginning of the year. On March 2, it issued 2,700 shares; on July 3, it issued
another 3,300 shares, and on December 1, it reacquired 480 shares as treasury stock.
McTeal Corporation had 12,000 shares of common stock outstanding at the beginning of the year. On March 2, it issued 2,700 shares; on July 3, it issued
another 3,300 shares, and on December 1, it reacquired 480 shares as treasury stock.
Weighted Average Shares
The nearest whole month is used.The nearest whole month is used.
Months Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstanding Whole Units
January–February 12,000 × 2/12 = 2,000March–June 14,700 × 4/12 = 4,900July–November 18,000 × 5/12 = 7,500December 17,520 × 1/12 = 1,460
15,860Total weighted average common shares
=×
Months Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstanding Whole Units
January–February 5,000 × 12/12 = 5,000
10,000Total weighted average common shares
=×
11
Wallers Corporation begins operations in January 2010 and issues 5,000 shares of common stock that are outstanding during all of 2010. On December
31, 2010, it issues a two-for-one stock split.
Wallers Corporation begins operations in January 2010 and issues 5,000 shares of common stock that are outstanding during all of 2010. On December
31, 2010, it issues a two-for-one stock split.
The two-for-one split is retroactive to January 1. The two-for-one split is retroactive to January 1. 5,000 5,000
Weighted Average Shares
ContinuedContinuedContinuedContinued
Months Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstanding Whole Units
January–February 5,000 × 12/12 = 5,000
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On May 27, 2011, Wallers Corporation issues 5,000 shares of common stock; on August 3, 2011, it
issues a 20% stock dividend; and on October 5, 2011, it issues 2,000 shares of stock.
On May 27, 2011, Wallers Corporation issues 5,000 shares of common stock; on August 3, 2011, it
issues a 20% stock dividend; and on October 5, 2011, it issues 2,000 shares of stock.
2010 Data on 2011 Statement2010 Data on 2011 Statement2010 Data on 2011 Statement2010 Data on 2011 Statement
5,000 × 200% × 120% = 12,000 equivalent whole units
Weighted Average Shares
× =
ContinuedContinuedContinuedContinued
January–May 10,000June–July 15,000August–September 18,000
13
2011 Data on 2011 Statement2011 Data on 2011 Statement2011 Data on 2011 Statement2011 Data on 2011 Statement
Issued 5,000 shares
Weighted Average Shares
Months Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstanding Whole Units=×
Issued 20% stock dividend
14
2011 Data on 2011 Statement2011 Data on 2011 Statement2011 Data on 2011 Statement2011 Data on 2011 Statement
Weighted Average Shares
Months Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstanding Whole Units
January–May 10,000June–July 15,000August–September 18,000
=×
18,00012,000 Increases 20%
Increases 20%
15
Weighted Average Shares
2011 Data on 2011 Statement2011 Data on 2011 Statement2011 Data on 2011 Statement2011 Data on 2011 Statement
Months Shares Shares Fraction of Year Equivalent Are Outstanding Outstanding Outstanding Whole Units
January–May 12,000 × 5/12 = 5,000June–July 18,000 × 2/12 = 3,000August–September 18,000 × 2/12 = 3,000October–December 20,000 × 3/12 = 5,000
16,000
=×
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Complex Capital Structure
Many corporations have a more complex capital structure that includes outstanding convertible securities or contingent shares that could have a
dilutive effect on earnings per share. These securities are
referred to as potential common shares.
Many corporations have a more complex capital structure that includes outstanding convertible securities or contingent shares that could have a
dilutive effect on earnings per share. These securities are
referred to as potential common shares.
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A corporation with a complex capital structure is required to report two earnings per share
amounts on the face of its income statement.
A corporation with a complex capital structure is required to report two earnings per share
amounts on the face of its income statement.
The two amounts are basic earnings per share and
diluted earnings per share.
The two amounts are basic earnings per share and
diluted earnings per share.
Diluted Earnings per Share
18
The amount for diluted earnings per share shows the earnings per share after including all potential common shares that would reduce earnings per share.
The amount for diluted earnings per share shows the earnings per share after including all potential common shares that would reduce earnings per share.
Diluted Earnings per Share
19
To be included in the diluted earnings per share calculation, any potential common share must have a dilutive
effect on earnings per share.
To be included in the diluted earnings per share calculation, any potential common share must have a dilutive
effect on earnings per share.
Diluted Earnings per Share
20
Step 1: Compute the basic earnings per share.Step 1: Compute the basic earnings per share.
Step 2: Include dilutive stock options and warrants and compute a tentative diluted earnings per share (DEPS).
Step 2: Include dilutive stock options and warrants and compute a tentative diluted earnings per share (DEPS).
Step 3: Develop a ranking of the impact of each convertible preferred stock and convertible bond on DEPS.
Step 3: Develop a ranking of the impact of each convertible preferred stock and convertible bond on DEPS.
Step 4: Include each dilutive convertible security in DEPS in a sequential order based on the ranking and compute a new tentative DEPS.
Step 4: Include each dilutive convertible security in DEPS in a sequential order based on the ranking and compute a new tentative DEPS.
Step 5: Select the lowest computed DEPS as the diluted earnings per share.
Step 5: Select the lowest computed DEPS as the diluted earnings per share.
Diluted Earnings per Share
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Proceeds ($)
Assumed Shares Reacquired (at average
market price)
Change Change (Incremental) in (Incremental) in
Shares Shares
Change Change (Incremental) in (Incremental) in
Shares Shares
+
–
Stock Options and Warrants
Assumed Shares Issued
=
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1. Determine the average market price of common shares during the period.
2. Compute the shares issued from the assumed exercise of all options and warrants.
3. Compute the proceeds received from the assumed exercise by multiplying the shares issued by the option price [plus any unrecognized compensation cost (net of tax) per share].
4. Compute the assumed shares reacquired by dividing the proceeds by the average market price.
5. Compute the incremental common shares.
Treasury Stock Method
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To illustrate Step 3 further, assume Plummer Corporation has compensatory stock options for employees to purchase 1,000 common shares at $18 per share outstanding the entire year, the average market price for the common stock during the year was $25 per share, and the
unrecognized compensation cost (net of tax) was $2 per share.
To illustrate Step 3 further, assume Plummer Corporation has compensatory stock options for employees to purchase 1,000 common shares at $18 per share outstanding the entire year, the average market price for the common stock during the year was $25 per share, and the
unrecognized compensation cost (net of tax) was $2 per share.
Treasury Stock Method
ContinuedContinuedContinuedContinued
Assumed increment in common shares for computing diluted earnings per share 200
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Shares assumed issued from assumed exercise: 1,000Shares assumed reacquired:
ProceedsAverage Market Price Per Share
= (800)
Treasury Stock Method
=1,000 × ($18 + $2)
$25=
$20,000$25
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Convertible bonds and convertible preferred stock are
considered for inclusion in DEPS after stock options and
warrants.
Convertible bonds and convertible preferred stock are
considered for inclusion in DEPS after stock options and
warrants.
Convertible Securities
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If bonds were assumed to be converted into common stock, the numerator increases because net income would be larger since the
interest expense (net of income taxes) for the converted bonds would not
exist.
If bonds were assumed to be converted into common stock, the numerator increases because net income would be larger since the
interest expense (net of income taxes) for the converted bonds would not
exist.
Convertible Securities
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Numerical Value Impact on Diluted Earnings Per Share
Numerical Value Impact on Diluted Earnings Per Share
Increase in Earnings per Share NumeratorIncrease in Earnings per Share Denominator
9% convertible preferred stock. Dividends of $5,400 were declared during the year. The
preferred shares are convertible into 3,000 shares of common stock.
9% convertible preferred stock. Dividends of $5,400 were declared during the year. The
preferred shares are convertible into 3,000 shares of common stock.
$5,400 3,000
= $1.80Security A
Convertible Securities
ContinuedContinuedContinuedContinued
28
Numerical Value Impact on Diluted Earnings Per Share
Numerical Value Impact on Diluted Earnings Per Share
Increase in Earnings per Share NumeratorIncrease in Earnings per Share Denominator
10% convertible bonds. Interest expense (net of income taxes) of $4,800 was recorded during the year. The bonds are convertible into 1,920 shares
of common stock.
10% convertible bonds. Interest expense (net of income taxes) of $4,800 was recorded during the year. The bonds are convertible into 1,920 shares
of common stock.
$4,800 1,920
= $2.50Security B
Convertible Securities
ContinuedContinuedContinuedContinued
29
Numerical Value Impact on Diluted Earnings Per Share
Numerical Value Impact on Diluted Earnings Per Share
Increase in Earnings per Share NumeratorIncrease in Earnings per Share Denominator
8% convertible preferred stock. Dividends of $8,000 were declared during the year. The
preferred shares are convertible into 5,000 shares of common stock.
8% convertible preferred stock. Dividends of $8,000 were declared during the year. The
preferred shares are convertible into 5,000 shares of common stock.
$8,000 5,000
= $1.60Security C
Convertible Securities
ContinuedContinuedContinuedContinued
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Numerical Value Impact on Diluted Earnings Per Share
Numerical Value Impact on Diluted Earnings Per Share
Increase in Earnings per Share NumeratorIncrease in Earnings per Share Denominator
7% convertible bonds. Interest expense (net of income taxes) of $6,300 was recorded during the year. The bonds are convertible into 3,150 shares
of common stock.
7% convertible bonds. Interest expense (net of income taxes) of $6,300 was recorded during the year. The bonds are convertible into 3,150 shares
of common stock.
$6,300 3,150
= $2.00Security D
Convertible Securities
ContinuedContinuedContinuedContinued
Security C has the lowest impact on DEPS and is the most dilutive. It is the first convertible security
(after options and warrants) to be included in DEPS (if dilutive).
A $1.80 2
B $2.50 4
C $1.60 1
D $2.00 3
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Security Impact Order in Ranking
Convertible Securities
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Testing to Determine Whether a Convertible Security is Dilutive
If the impact of the first ranked convertible security is less than the initial tentative DEPS, add the potential income to the
numerator and the potential shares to the denominator and continue this procedure
until the impact of the next convertible security is more than the previously
computed tentative DEPS.
If the impact of the first ranked convertible security is less than the initial tentative DEPS, add the potential income to the
numerator and the potential shares to the denominator and continue this procedure
until the impact of the next convertible security is more than the previously
computed tentative DEPS.
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Earnings Shares Earnings Explanation (Adjustments) (Adjustments) Per Share=
FormatFormat
Basic earnings per share $xxxx ÷ xxx = $xxx BasicIncrement in shares (options) xxDEPS1 earnings and shares $xxxx ÷ xxx = $xxx DEPS1
Savings in interest expense (bonds) xxxIncrement in shares (bonds) xxx
DEPS2 earnings and shares $xxxx ÷ xxx = $xxx DEPS2
Savings in preferred dividends xxx Increment in shares from
preferred stock xxx Diluted earnings and shares $xxxx ÷ xxx = $xxx Diluted
Computation and Reporting of Diluted Earnings per Share
÷
34
Computation and Reporting of Diluted Earnings per Share
35
Computation and Reporting of Diluted Earnings per Share
Earnings Shares Earnings Explanation (Adjustments) (Adjustments) Per Share
Net income $2,800Less: Preferred dividends 800Basic earnings per share $2,000 ÷ 900 = $2.22 Basic
÷ =
36
Computation and Reporting of Diluted Earnings per Share
37
Computation and Reporting of Diluted Earnings per Share
Earnings Shares Earnings Explanation (Adjustments) (Adjustments) Per Share=
Net income $2,800Less: Preferred dividends 800Basic earnings per share $2,000 ÷ 900 = $2.22 BasicIncrement in shares (options) 85DEPS1 earnings and shares $2,000 ÷ 985 = $2.03 DEPS1
÷
38
Computation and Reporting of Diluted Earnings per Share
Computation and Reporting of Diluted Earnings per Share
Security Impact Ranking
Preferred$800
100 × 4=
$800400
= $2.00
Bonds[($5,000 × 0.06) + $20] × (1 – 0.3)
5 × 32=
$224160
= $1.40
2
1
40
Computation and Reporting of Diluted Earnings per Share
The $2.00 impact on DEPS of the convertible preferred stock is more than $1.94; therefore,
inclusion of the preferred stock in DEPS would be antidilutive.
The $2.00 impact on DEPS of the convertible preferred stock is more than $1.94; therefore,
inclusion of the preferred stock in DEPS would be antidilutive.
Earnings Shares Earnings Explanation (Adjustments) (Adjustments) Per Share=
Basic earnings per share $2,000 ÷ 900 = $2.22 BasicIncrement in shares (options) 85DEPS1 earnings and shares $2,000 ÷ 985 = $2.03 DEPS1
Savings in interest expense (bonds) 224Increment in shares (bonds) 160
Diluted earnings and shares $2,224 ÷ 1,145 = $1.94 Diluted
÷
41
When a corporation reports its basic and diluted earnings per share on its income
statement, it also is required to make additional disclosures in the notes to its
financial statements.
When a corporation reports its basic and diluted earnings per share on its income
statement, it also is required to make additional disclosures in the notes to its
financial statements.
Additional Disclosures
42
1. Identifies the amount of preferred dividends deducted to determine the income available to common stockholders.
2. Describes the potential common shares that were not included in the diluted earnings per share computation because they were antidilutive.
3. Describe any material impact on the common shares outstanding of transactions after the close of the accounting period but before the issuance of the financial report.
Additional Disclosures
These include a schedule or note which includes information that:
43
IFRS vs. U.S. GAAP
Due to convergence efforts, IFRS and U.S. GAAP are similar in regard to computing and reporting basic and diluted earnings per share. However, the following differences do exist: When using the treasury stock method, IFRS do
not require a company to include any unrecognized compensation cost in the assumed proceeds from issuing the stock.
GAAP requires that any unvested contingently issuable shares be excluded from basic EPS calculations. IFRS has no such requirement.
44
IFRS vs. U.S. GAAP
For contracts that may be settled in shares or cash, if a cash settlement is presumed, U.S. GAAP requires an adjustment to earnings but IFRS do not.
Finally, because IFRS do not have the concept of extraordinary items, there is no EPS disclosure related to extraordinary items.
Due to convergence efforts, IFRS and U.S. GAAP are similar in regard to computing and reporting basic and diluted earnings per share. However, the following differences do exist:
45
Cash Property Scrip Stock Liquidating
Cash Property Scrip Stock Liquidating
Types of Dividends
46
Declared Not larger than unrestricted
retained earnings Not paid on treasury stock Other restrictions Scrip
Declared Not larger than unrestricted
retained earnings Not paid on treasury stock Other restrictions Scrip
Dividend Considerations
47
The date of declaration
The ex-dividend date
The date of record The date of
payment
There are four significant dates for a
cash dividend.
There are four significant dates for a
cash dividend.
Cash Dividends
48
Date Accounting Procedures
Date of DeclarationReduce Retained Earnings
Increase Liabilities
Memorandum Entry
Cash Dividend
Reduce Assets
Reduce Liabilities
Date of Record
Date of Payment
49
Cash Dividends
On November 2, 2010, the board of directors of Bay Corporation declares preferred dividends
totaling $10,000 and common dividends totaling $20,000. These dividends are payable on December
14, 2010, to stockholders of record on November 23, 2010.
On November 2, 2010, the board of directors of Bay Corporation declares preferred dividends
totaling $10,000 and common dividends totaling $20,000. These dividends are payable on December
14, 2010, to stockholders of record on November 23, 2010.
November 2, 2010Retained Earnings 30,000
Dividends Payable: Preferred Stock 10,000Dividends Payable: Common Stock 20,000
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November 23, 2010Memorandum entry: The company will pay dividends on December 14, 2010, to preferred and common stockholders of record as of today, the date of record.
Cash Dividends
On November 2, 2010, the board of directors of Bay Corporation declares preferred dividends
totaling $10,000 and common dividends totaling $20,000. These dividends are payable on December
14, 2010, to stockholders of record on November 23, 2010.
On November 2, 2010, the board of directors of Bay Corporation declares preferred dividends
totaling $10,000 and common dividends totaling $20,000. These dividends are payable on December
14, 2010, to stockholders of record on November 23, 2010.
51
Cash Dividends
On November 2, 2010, the board of directors of Bay Corporation declares preferred dividends
totaling $10,000 and common dividends totaling $20,000. These dividends are payable on December
14, 2010, to stockholders of record on November 23, 2010.
On November 2, 2010, the board of directors of Bay Corporation declares preferred dividends
totaling $10,000 and common dividends totaling $20,000. These dividends are payable on December
14, 2010, to stockholders of record on November 23, 2010.
December 14, 2010Dividends Payable: Preferred Stock 10,000Dividends Payable: Common Stock 20,000
Cash 30,000
52
Everett Corporation has issued 10%, participating, cumulative preferred stock
with a total par value of $20,000 and common stock
with a total par value of $30,000. The preferred
stock is two years in arrears. Everett
Corporation declares a $9,000 dividend.
Everett Corporation has issued 10%, participating, cumulative preferred stock
with a total par value of $20,000 and common stock
with a total par value of $30,000. The preferred
stock is two years in arrears. Everett
Corporation declares a $9,000 dividend.
Fully Participating Preferred Stock Dividends
53
Preferred Common
10% dividend to Preferred (10% × $20,000) $2,000Common dividend (10% × $30,000)
$3,000Extra dividend proportionate to par values:
Total to allocate $ 9,000Allocated (5,000)Remainder [40% ($20,000 ÷ $50,000) to preferred, 60% ($30,000 ÷ $50,000 to common) $ 4,000 1,600
2,400Dividends to each class of stock $3,600
$5,400
Fully Participating Preferred Stock Dividends
54
Partially Participating Preferred Stock Dividends (up to 12%)
Again, assume a $30,000 dividend.
Preferred Common
10% dividend to Preferred (10% × $20,000) $2,000Common dividend (10% × $30,000)
$3,0002% dividend on par of Preferred (2% × $20,000) 4002% dividend on par of Common (2% × $30,000)
600Remainder to common ($9,000 – $6,000 allocated)
3,000Dividends to each class of stock $3,600
$5,400
55
Occasionally, a corporation will declare a property dividend that is payable in assets other than cash.
Occasionally, a corporation will declare a property dividend that is payable in assets other than cash.
Property Dividends
56
The corporation typically uses marketable securities of other companies that it owns for the
property dividend.
The corporation typically uses marketable securities of other companies that it owns for the
property dividend.
Property Dividends
57
The corporation records a property dividend at the fair value
of the asset transferred, and recognizes a gain or loss.
The corporation records a property dividend at the fair value
of the asset transferred, and recognizes a gain or loss.
Property Dividends
58
Asel Corporation declares a property dividend payable in held-to-maturity bonds of Bard Company. The bonds are carried on Asel
Corporation’s books at a book value of $40,000 but their current fair value is $48,000.
Asel Corporation declares a property dividend payable in held-to-maturity bonds of Bard Company. The bonds are carried on Asel
Corporation’s books at a book value of $40,000 but their current fair value is $48,000.
Property Dividends
ContinuedContinuedContinuedContinued
59
Date of Declaration
Investment in Bard Company Bonds 8,000Gain on Disposal of Investments 8,000
Retained Earnings 48,000Property Dividends Payable 48,000
Property Dividends
Date of PaymentProperty Dividends Payable 48,000
Investment in Bard Company Bonds 48,000
ContinuedContinuedContinuedContinued
$48,000 $48,000 – $40,000– $40,000
60
1. They receive no corporate assets.
2. Their percentage ownership does not change.
3. Theoretically the total market value of their investment will remain the same.
4. Future cash dividends may be limited because retained earnings is decreased by the amount of the stock dividend.
Stockholders often view stock
dividends favorably even
though:
Stock Dividends
61
What factors might enhance the perceived
attractiveness of a stock dividend?
What factors might enhance the perceived
attractiveness of a stock dividend?
Stock Dividends
Stock DividendStock Dividend
62
1. The stockholders may see the stock dividend as evidence of corporate growth.
2. The stockholders may see the stock dividend as evidence of sound financial policy.
3. Other investors may see the stock dividend in a similar light, and increased trading in the stock may cause the market price not to decrease proportionally.
Stock Dividends
ContinuedContinuedContinuedContinued
63
4. The corporation may state that it will pay the same fixed cash dividend per share, in which case individual shareholders will receive higher total future cash dividends.
5. The stockholders may see the market price decreasing to a lower trading range, making the stock more attractive to additional investors so that the market price may eventually rise.
Stock Dividends
64
Retained Earnings
Capital Stock
Additional Paid-In Capital
Par ValueFair Value
Retained Earnings
Capital Stock
Stock Dividends
Small(<20% or 25%)
Large
– + + +–
65
Common stock, $10 par (20,000 shares issued and outstanding)
$200,000Additional paid-in capital
180,000Retained earnings
320,000Total Stockholders’ Equity
$700,000
Stockholders’ equity prior to the stock dividend:Stockholders’ equity prior to the stock dividend:
Stock Dividends
66
Ringdahl Corporation declares and issues a 10% stock dividend. On the date of declaration, the
stock sells for $23 per share.
Ringdahl Corporation declares and issues a 10% stock dividend. On the date of declaration, the
stock sells for $23 per share.
Date of Declaration
Retained Earnings 46,000Common Stock To Be Distributed 20,000Additional Paid-in Capital From Stock Dividend 26,000
Small Stock Dividend
20,000 shares 20,000 shares × 0.10 × $23× 0.10 × $23
ParParParPar
ContinuedContinuedContinuedContinued
67
Date of IssuanceCommon Stock To Be Distributed 20,000
Common Stock, $10 par 20,000
Small Stock Dividend
Ringdahl Corporation declares and issues a 10% stock dividend. On the date of declaration, the
stock sells for $23 per share.
Ringdahl Corporation declares and issues a 10% stock dividend. On the date of declaration, the
stock sells for $23 per share.
ParParParPar
68
Common stock, $10 par (22,000 shares issued and outstanding)
$220,000Additional paid-in capital
206,000Retained earnings
274,000Total Stockholders’ Equity
$700,000
Stockholders’ equity prior to the stock dividend:Stockholders’ equity prior to the stock dividend:
Small Stock Dividend
Note: Total remained the same
69
Ringdahl Corporation declares and issues a 40% stock dividend. On the date of declaration, the
stock sells for $23 per share.
Ringdahl Corporation declares and issues a 40% stock dividend. On the date of declaration, the
stock sells for $23 per share.
Date of DeclarationRetained Earnings 80,000
Common Stock To Be Distributed 80,000
Large Stock Dividend
20,000 shares 20,000 shares × 0.40 × $10× 0.40 × $10
ContinuedContinuedContinuedContinued
Date of IssuanceCommon Stock To Be Distributed 80,000
Common Stock, $10 par 20,000
70
Common stock, $10 par (28,000 shares issued and outstanding)
$280,000Additional paid-in capital
180,000Retained earnings
240,000Total Stockholders’ Equity
$700,000
Stockholders’ equity prior to the stock dividend:Stockholders’ equity prior to the stock dividend:
Small Stock Dividend
Note: Total is the same as the small
stock dividend
Corporations are required to report a few events as either retrospective
adjustments or prior period adjustments (restatements) of retained earnings. These include changes in accounting
principles, a change in accounting entity, and corrections of errors of prior
periods.
Corporations are required to report a few events as either retrospective
adjustments or prior period adjustments (restatements) of retained earnings. These include changes in accounting
principles, a change in accounting entity, and corrections of errors of prior
periods.
71
Prior Period Adjustments (Restatements)
72
Prior period adjustments and retrospective adjustments look the
same. Changes in accounting principles are called retrospective adjustments and error corrections
are called prior period adjustments.
Prior period adjustments and retrospective adjustments look the
same. Changes in accounting principles are called retrospective adjustments and error corrections
are called prior period adjustments.
Prior Period Adjustments (Restatements)
73
To indicate that a certain portion of retained earnings is not available for dividends, a corporation may restrict
(appropriate) retained earnings. A restriction (appropriation) of retained
earnings means that the board of directors establishes a formal policy that a portion of retained earnings is
unavailable for dividends.
To indicate that a certain portion of retained earnings is not available for dividends, a corporation may restrict
(appropriate) retained earnings. A restriction (appropriation) of retained
earnings means that the board of directors establishes a formal policy that a portion of retained earnings is
unavailable for dividends.
Restrictions (Appropriations) of Retained Earnings
74
Although not a required separate financial statement, many
corporations include a statement of retained earnings in their financial
statements.
Although not a required separate financial statement, many
corporations include a statement of retained earnings in their financial
statements.
Statement of Retained Earnings
75
Retained earnings, as previously reported, January 1, 2010
Plus (minus): Prior period and retrospective adjustments (net of income tax effect)
Adjusted retained earnings, January 1, 2010
Plus (minus): Net income (loss)
Minus: Dividends (specifically identified, including per share amounts)
Reductions because of retirement or reacquisition of capital stock
Reductions because of conversion of bonds or preferred stock
Retained earnings, December 31, 2010
Retained earnings, as previously reported, January 1, 2010
Plus (minus): Prior period and retrospective adjustments (net of income tax effect)
Adjusted retained earnings, January 1, 2010
Plus (minus): Net income (loss)
Minus: Dividends (specifically identified, including per share amounts)
Reductions because of retirement or reacquisition of capital stock
Reductions because of conversion of bonds or preferred stock
Retained earnings, December 31, 2010
Statement of Retained Earnings
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Unrealized increases (gains) or decreases (losses) in the fair value of investments in available-for-sale securities
Translation adjustments from converting the financial statements of a company’s foreign operation into U.S. dollars
Certain gains and losses on “derivative” financial instruments
Certain pension plan gains, losses, and prior service cost adjustments
Other comprehensive income (loss) might include four items:
Accumulated Other Comprehensive Income
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On the face of its income statement In a separate statement of comprehensive
income In its statement of changes in stockholders’
equity
A corporation may report its comprehensive income (net of income taxes):
Accumulated Other Comprehensive Income
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Stockholders’ Equity Section of a Corporate Balance Sheet
Contributed Capital (Paid-in Capital)– Preferred stock– Common stock– Additional paid-in-capital
Retained earnings Accumulated other comprehensive income
– Unrealized gains and losses on securities available for sale– Change in additional liability related to pensions– Certain gains and losses on derivative financial instruments– Amount from foreign currency translation adjustments and
gains and losses from certain forward exchange contracts Less: Treasury stock (at cost) Total stockholders’ equity
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Statement of Changes in Stockholders’ Equity
GAAP states: “…disclosure of changes in the separate accounts comprising stockholders’
equity (in addition to retained earnings) and of the changes in the number of shares of equity
securities during at least the most recent annual fiscal period…is required to make the financial statements sufficiently informative.”
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Statement of Changes in Stockholders’ Equity
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IFRS vs. U.S. GAAP
Under IFRS, a corporation’s shareholders’ interests (the term used for stockholders’ equity) consists of two sections: (a) share capital and (b) other equity.
Many of the disclosures required under share capital are the same as those required under U.S. GAAP—for example, the number of shares authorized, issued, and outstanding, par value, reacquired shares and rights, preferences, and restrictions regarding dividends.
IFRS require disclosure of the “movement” in share capital accounts and other equity for the period.
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Chapter 17
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