Chapter 18 A debit balance in retained earnings is referred

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