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18-18 Intermediate Accounting, 8/e
RETAINED EARNINGS
❖ In general, retained earnings represents a corporation's
accumulated, undistributed, or reinvested net income (or net
loss). It also is called “reinvested capital” or “earned capital.”
CASH DIVIDENDS
On June 1, the board of directors of Craft Industries declares a
cash dividend of $2 per share on its 100 million shares, payable
to shareholders of record June 15, to be paid July 1:
($ in millions)
June 1 – declaration date
Retained earnings .............................................. 200
T18-13
18-20 Intermediate Accounting, 8/e
PROPERTY DIVIDENDS
❖ Before recording a property dividend, the asset first must be
written up to fair market value.
On October 1, the board of directors of Craft Industries
to be distributed November 1:
October 1 – declaration date ($ in millions)
Investment in Beaman Corporation
preferred stock ......................................... 1
Gain on appreciation of investment ($10 – $9) 1
T18-14
STOCK DIVIDENDS
❖ A stock dividend is the distribution of additional shares of
stock to current shareholders of the corporation.
❖ Because each shareholder receives the same percentage
Craft declares and distributes a 10% common stock dividend
(10 million shares) when the market value of the $1 par common
stock is $12 per share:
($ in millions)
T18-15
18-22 Intermediate Accounting, 8/e
STOCK SPLITS
❖ A stock distribution of 25% or higher is referred to as a stock
split.
❖ A frequent reason for issuing a stock split is to reduce the
Craft declares and distributes a 2 for 1 stock split effected
in the form of a 100% stock dividend (100 million shares)
when the market value of the $1 par common stock is $12
per share:
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1. Research Activity
Ask students to look up three companies in the Money & Investing section of the Wall Street
Suggestions:
Pose these questions:
1. What information does the rate of return provide?
Points to note:
The rate of return on the market value of shareholders' equity is the inverse of the price-earnings
ratio, i.e., the earnings-price ratio. The rate of return on the market value of shareholders' equity is a
2. Real World Scenario
Hormel Foods Corp., which makes Spam and other prepared foods, distributed a two-for-one stock
split in March 2011. At the time the split was announced, the company's stock price was $49.
Suggestions:
Ask students to:
1. Speculate as to why Hormel declared the stock split.
18-24 Intermediate Accounting, 8/e
3. Real World Scenario
Following is a news release from General Electric:
FAIRFIELD, Conn.--(BUSINESS WIRE)--Dec. 10, 2004--The Board of Directors of GE today
raised the Company's quarterly dividend 10% to $0.22 per outstanding share of its common stock
and authorized the repurchase of up to $15 billion of its common stock over the next three years.
"GE has tremendous prospects for growth in earnings and cash flow," said GE Chairman and CEO
Jeff Immelt.
Suggestions:
Ask students to consider the statement that GE has the “flexibility to invest in technology and
Points to note:
Companies have choices regarding the disposition of earnings. One choice is to reinvest in profit-
4. Real World Scenario
Following is a news release from Northeast Community Bancorp:
Northeast Community Bancorp, Inc. (NASDAQ: NECB) today announced that its Board of
Directors declared an initial quarterly cash dividend of $0.03 per common share. The dividend
Suggestions:
Ask students to:
1. Consider the effect on the share price on the ex-date, other things being equal.
Points to note:
Normally, the stock price declines by the amount of a cash dividend, $.03 in this case, the first
day the stock trades after the recipients of the dividend are determined. Dividends use cash
5. Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis, and judgment skills.
Communication Skills. Analysis Case 18-2, Exercise 18-23, and Problem 18-6 are suitable for
student presentation(s). In addition to Communication Cases 18-3 and 18-6, Research Case
18-4 can be adapted to ask students to prepare a memo to the Controller outlining the findings
Research Skills. In their professional lives, our graduates will be required to locate and extract
relevant information from available resource material to determine the correct accounting
practice, perhaps identifying the appropriate authoritative literature to support a decision. In
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret date to provide options for making
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that require
6. Ethical Dilemma
The chapter includes the following ethical dilemma.
ETHICAL DILEMMA
Interworld Distributors has paid quarterly cash dividends since 1985. The dividends have
steadily increased from $.25 per share to the latest dividend declaration of $2.00 per share. The
board of directors is eager to continue this trend despite the fact that revenues fell significantly
You may wish to discuss this in class. If so, discussion should include these elements:
Step 1 - The Facts:
The founder of Interworld Distributors suggests distributing a 5% stock dividend in lieu of its
regular $2.00 per share cash dividend. The board of directors wants to continue providing dividends
to shareholders despite the fact that revenues have recently declined. The stock dividend will permit
Step 2 - The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether the board’s obligation to protect the company’s image
(and perhaps their jobs) is greater than its obligation to protect investors’ and creditors’ interests by
Step 3 - Values:
Values include honesty, integrity, objectivity, loyalty to the company, loyalty to shareholders,
and responsibility to users of financial statements.
18-28 Intermediate Accounting, 8/e
Step 4 - Alternatives:
1. Distribute and record a 5% stock dividend to current holders of common stock.
Step 5 - Evaluation of Alternatives in Terms of Values:
1. Alternative 1 illustrates loyalty to protecting the company image to current shareholders.
Step 6 - Consequences:
Alternative 1
Positive consequences: The company and its management may look better in the eyes of some
shareholders. The company reserves cash to invest in the future modernization of plant facilities.
Alternative 2
Positive consequences: The founder and board members maintain self-respect and gain the
respect of the financial community. Users of the financial statements are better informed regarding
Step 7 - Decision:
Student(s) must decide their course of action.
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Learning Est. time
Questions Objective(s) Topic (min.)
18-1
1
Sources of shareholders’ equity
5
18-2
1
Sources of shareholders’ equity
5
18-3
1
Sources of shareholders’ equity
5
18-4
1
Sources of shareholders’ equity
5
18-12
2
Comprehensive income
5
18-13
2
Comprehensive income
5
18-14
3
Statement of shareholders' equity
5
18-15
4
Shares sold for consideration other than cash
5
18-16
4
More than one security sold for a single price
5
18-30 Intermediate Accounting, 8/e
Brief Learning Est. time
Exercises Objective(s) Topic (min.)
18-1
2
Comprehensive income
5
18-2
4
Stock issued
5
18-3
4
Stock issued
5
18-4
4
Stock issued
5
Learning Est. time
Exercises Objective(s) Topic (min.)
18-1
2
Comprehensive income
25
18-2
2
FASB codification research; reporting other
comprehensive income in shareholders’ equity
15
18-3
2
Earnings or OCI?
15
18-4
4
Stock issued for cash; Wright Medical Group
15
15
18-11
5
Retirement of shares
15
18-12
5
Retirement of shares
20
18-13
5
Treasury stock
15
18-14
5
Treasury stock –weighted average and FIFO cost
20
18-15
5
Reporting shareholders’ equity
20
18-16
5
Change from treasury stock to retired stock
20
CPA/CMA Learning Est. time
Exam Questions Objective(s) Topic (min.)
CPA-1
5
Retirement of shares
3
CPA-2
5
Treasury stock
3
CPA-3
7
Property dividend
3
18-32 Intermediate Accounting, 8/e
Learning Est. time
Problems Objective(s) Topic (min.)
18-1
4
Various stock transactions; correction of
journal entries
25
18-2
5
Share buyback – comparison of methods
35
18-7
1-4
Reporting shareholders' equity: comprehensive
income; Cisco Systems
35
18-8
3,
4, 7
Share issue costs; issuance; dividends; early
retirement
15
Star Problems
Learning Est. time
Cases Objective(s) Topic (min.)
Real World Case 18-1
4
IPO; Dolby Labs
10
Analysis Case 18-2
1, 3, 6, 7
Statement of shareholders' equity
35
Communication Case 18-3
1
Is preferred stock debt or equity? group
interaction
30
for equipment
25
Research Case 18-9
1, 6
Researching the way shareholders’ equity
transactions are reported; retrieving financial
statements from the Internet
50
Communication Case 18-10
1
Should the present two-category distinction
between liabilities and equity be retained?
group interaction
30
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