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CHAPTER 14
Corporations: Dividends, Retained Earnings,
and Income Reporting
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
A
Problems
1. Explain how to account for
cash dividends.
1, 2, 3, 4
1, 2
1
1, 2, 6
1A, 2A, 3A,
4A, 5A
2. Explain how to account for
stock dividends and splits.
1, 5, 6, 7, 8
3, 4
2
3, 4, 5, 6, 7
1A, 2A, 3A,
4A, 5A
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Prepare dividend entries and stockholders’ equity section.
Simple
30–40
2A
Journalize and post transactions; prepare retained
earnings statement and stockholders’ equity section.
Moderate
30–40
3A
Prepare retained earnings statement and stockholders’
equity section, and compute allocation of dividends and
earnings per share.
Moderate
30–40
WEYGANDT ACCOUNTING PRINCIPLES 12E
CHAPTER 14
CORPORATIONS: DIVIDENDS, RETAINED EARNINGS,
AND INCOME REPORTING
Number
LO
BT
Difficulty
Time (min.)
BE1
1
AP
Simple
2–4
BE2
1
AP
Simple
4–6
BE3
2
AP
Simple
6–8
BE4
2
AP
Simple
3–5
BE5
3
AP
Simple
4–6
BE6
3
AP
Simple
2–4
BE7
3
AP
Simple
2–4
BE8
3
AP
Simple
2–4
BE9
4
AP
Simple
4–6
DI3
3
AP
Simple
4–6
DI4
4
AP
Simple
6–8
EX1
1
AP
Simple
6–8
EX2
1
AP
Simple
6–8
EX3
2
AP
Simple
4–6
EX4
2
AP
Simple
6–8
EX5
2, 3
AP
Simple
6–8
EX6
1–3
AN
Simple
8–10
EX7
2
AN
Moderate
5–7
EX8
3
AP
Simple
4–6
EX9
3
AP
Simple
4–6
EX10
3
AP
Simple
6–8
CORPORATIONS: DIVIDENDS, RETAINED EARNINGS,
AND INCOME REPORTING (Continued)
Number
LO
BT
Difficulty
Time (min.)
EX15
3, 4
AP
Simple
6–8
EX16
3, 4
AP
Simple
6–8
EX17
4
AP
Simple
4–6
P1A
1–3
AP
Simple
30–40
BYP1
1
AP
Simple
4–6
BYP2
3, 4
AN
Simple
10–15
BYP3
3, 4
AN
Simple
10–15
BYP4
3
AN
Simple
15–20
BYP5
1–3
AP
Moderate
15–20
BLOOM’ S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
1. Explain how to account for
cash dividends.
Q14-1
Q14-2
Q14-3
Q14-4
BE14-1
BE14-2
DI14-1
E14-1
E14-2
P14-1A
P14-2A
P14-3A
P14-4A
P14-5A
E14-6
2. Explain how to account for
stock dividends and splits.
Q14-1
Q14-5
Q14-6
Q14-7
Q14-8
BE14-3
BE14-4
DI14-2
E14-3
E14-4
E14-5
P14-1A
P14-2A
P14-3A
P14-4A
P14-5A
E14-6
E14-7
ANSWERS TO QUESTIONS
1. (a) A dividend is a distribution of cash or stock by a corporation to its stockholders on a pro rata
(proportional) basis.
2. Jan Kimler is not correct. Adequate cash is only one of the conditions. In order for a cash dividend
to occur, a corporation must also have retained earnings and the dividend must be declared by
the board of directors.
3. (a) The three dates are:
Declaration date is the date when the board of directors formally declares the cash dividend
and announces it to stockholders. The declaration commits the corporation to a binding legal
4. The allocation of the cash dividend is as follows:
Total dividend ............................................................................... $55,000
Allocated to preferred stock
Dividends in arrears—one year ............................................. $10,000
5. A cash dividend decreases assets, retained earnings, and total stockholders’ equity. A stock dividend
decreases retained earnings, increases paid-in capital, and has no effect on total assets and total
stockholders’ equity.
6. A corporation generally issues stock dividends for one of the following reasons:
(a) To satisfy stockholders’ dividend expectations without spending cash.
(b) To increase the marketability of its stock by increasing the number of shares outstanding
7. In a stock split, the number of shares is increased in the same proportion that par value is decreased.
Thus, in the Gorton Corporation the number of shares will increase to 60,000 = (30,000 X 2) and
Questions Chapter 14 (Continued)
8. The different effects of a stock split versus a stock dividend are:
Item
Stock Split
Stock Dividend
Total paid-in capital
Total retained earnings
No change
No change
Increase
Decrease
9. A prior period adjustment is a correction of an error in previously issued financial statements. The
correction is reported in the current year’s retained earnings statement as an adjustment of the
beginning balance of retained earnings.
10. The understatement of depreciation in a prior year overstates the beginning retained earnings
balance. The retained earnings statement presentation is:
11. The purpose of a retained earnings restriction is to indicate that a portion of retained earnings is
currently unavailable for dividends. Restrictions may result from the following causes: legal, contractual,
or voluntary.
12. Retained earnings restrictions are generally disclosed in the notes to the financial statements.
13. The debits and credits to retained earnings are:
Debits
Credits
1.
Net loss
1.
Net income
2.
Prior period adjustments for
2.
Prior period adjustments for
14. Rafy is incorrect. Only the ending balance of retained earnings is reported in the stockholders’
equity section.
15. Dean should be told that although many factors affect the market price of a stock at a given time, the
Questions Chapter 14 (Continued)
16. The unique feature of a corporation income statement is a separate section that shows income
taxes or income tax expense. The presentation is as follows:
Income before income taxes .................................................................................. $500,000
18. Apple reported the following basic earnings per share amounts in 2009 to 2013: $9.22, $15.41,
$28.05, $44.64, and $40.03.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 14-1
Nov. 1 Cash Dividends (80,000 X $1/share) .............. 80,000
Dividends Payable ................................... 80,000
BRIEF EXERCISE 14-2
Total dividend $375,000
Allocated to preferred stock:
BRIEF EXERCISE 14-3
Dec. 1 Stock Dividends (7,500 X $16) ........................ 120,000
Common Stock Dividends Distributable
BRIEF EXERCISE 14-4
Before
Dividend
After
Dividend
(a)
Stockholders’ equity
Paid-in capital
Common stock, $10 par
In excess of par
$2,000,000
—
$2,200,000
80,000
(b)
Outstanding shares
200,000
220,000
BRIEF EXERCISE 14-5
SOTO INC.
Retained Earnings Statement
For the Year Ended December 31, 2017
Balance, January 1 ........................................................................ $220,000
Add: Net income ......................................................................... 170,000
BRIEF EXERCISE 14-6
PALMER INC.
Retained Earnings Statement
For the Year Ended December 31, 2017
Balance, January 1, as reported ................................ $800,000
Correction for overstatement of net income
in prior period (insurance expense error) ............. (50,000)
Balance, January 1, as adjusted ................................ 750,000
BRIEF EXERCISE 14-7
Return on stockholders’ equity:
BRIEF EXERCISE 14-8
BRIEF EXERCISE 14-9
REINSCH CORPORATION
Income Statement
For the Year Ended December 31, 2017
Sales revenue .............................................................................. $350,000
Cost of goods sold ...................................................................... 205,000
Gross profit .................................................................................. 145,000
BRIEF EXERCISE 14-10
Earnings per share = $1.90, or ($380,000 ÷ 200,000)
BRIEF EXERCISE 14-11
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 14-1
1. The company has not missed past dividends and the preferred stock is
noncumulative; thus, the preferred stockholders are paid only this year’s
dividend. The dividend paid to preferred stockholders would be $21,000
(3,000 X .07 X $100). The dividend paid to common stockholders would
be $84,000 ($105,000 – $21,000).
DO IT! 14-2
(a) (1) The stock dividend amount is $2,760,000 [(400,000 X 15%) X $46].
The new balance in retained earnings is $9,240,000 ($12,000,000 –
$2,760,000).
(b) (1) and (2) The effects on the equity accounts are as follows:
Original
Balances
After
Dividend
After Split
Paid-in capital
$ 2,800,000
$ 5,560,000
$ 2,800,000
DO IT! 14-3
FOLEY CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2017
Balance, January 1, as reported ............................. $3,100,000
Correction for understatement of net
DO IT! 14-4
(a)
2016
2017
Return on common
stockholders’
($100,000– $30,000) = 10.4%
($600,000 + $750,000) /2
($110,000–$30,000) = 10.1%
($750,000 + $830,000)/2
(c) Between 2016 and 2017, return on common stockholders’ equity de-
creased from 10.4% to 10.1%. Earnings per share, however, improved
from $1.40 to $1.78. It is important to note that net income barely
SOLUTIONS TO EXERCISES
EXERCISE 14-1
(a) Apr. 1 Cash (25,000 X $17) ................................ 425,000
Common Stock (25,000 X $5) ......... 125,000
Paid-in Capital in Excess of
Stated Value ................................ 300,000
Dec. 1 Cash (2,000 X $19) .................................. 38,000
Common Stock (2,000 X $5) ........... 10,000
Paid-in Capital in Excess of
Stated Value ................................ 28,000
EXERCISE 14-2
(a)
2016
2017
2018
Total dividend
$5,000
$12,000
$28,000
(b)
2016
2017
2018
Total dividend
$5,000
$12,000
$28,000
(c) Dec. 31 Cash Dividends ....................................... 28,000
EXERCISE 14-3
(a) Stock Dividends (21,000* X $18) ............................ 378,000
Common Stock Dividends Distributable
(21,000 X $10) .............................................. 210,000
(b) Stock Dividends (36,000* X $20) ............................ 720,000
Common Stock Dividends Distributable
EXERCISE 14-4
Before
Action
After
Stock
Dividend
After
Stock
Split
Stockholders’ equity
Paid-in capital
Common stock
$ 500,000
$ 525,000
$ 500,000
Outstanding shares
50,000
52,500
100,000
EXERCISE 14-5
(a) (1) Par value before the stock dividend was $5.
(b) Common stock
Balance before dividend ................................................. $400,000
Dividend shares (8,000 X $5) .......................................... 40,000
New balance............................................................. $440,000
Paid-in capital in excess of par—Common stock
EXERCISE 14-6
Paid-in Capital
Item
Capital Stock
Additional
Retained Earnings
1.
2.
NE
I
NE
NE
D
NE
EXERCISE 14-7
1. Dec. 31 Cash Dividends ............................... 50,000
Interest Expense ..................... 50,000
2. 31 Stock Dividends .............................. 8,000
Dividends Payable .......................... 10,000
EXERCISE 14-8
EDDY CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2017
Balance, January 1, as reported ............................. $650,000
Correction for overstatement of 2016 net
EXERCISE 14-9
NEWLAND COMPANY
Retained Earnings Statement
For the Year Ended December 31, 2017
Balance, January 1, as reported ................................. $310,000
Correction for understatement of 2015 net income ...... 20,000
EXERCISE 14-10
DIRK COMPANY
Balance Sheet (Partial)
December 31, 2017
Paid-in capital
Capital stock
Preferred stock ................................................ $125,000
Common stock ................................................. 500,000
Total capital stock ..................................... $ 625,000
