ACCOUNTING PRINCIPLES: Problem Solving Survival Guide, Volume 2: Chapters 13-26, 10th Edition

CHAPTER 14

CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING

OVERVIEW

The term earnings refers to net income for a period. The term retained earnings refers to accumulated earnings. That is, retained earnings is the total of all amounts reported as net income since the inception of the corporation less the sum of any amounts reported as net losses and dividends declared since the inception of the corporation. Thus, distributions of corporate profits to stockholders reduce retained earnings. A corporation may distribute cash, noncash assets, or additional shares of the corporation's own stock to its owners in the form of dividends. A distribution of a corporation's own stock results in capitalizing retained earnings. Cash dividends and stock dividends are discussed in this chapter.

Material items not typical of customary operations are reported net of their related tax effect in a separate section of the corporation's income statement. These items are among the other subjects covered in this chapter.

SUMMARY OF STUDY OBJECTIVES

1. Prepare the entries for cash dividends and small stock dividends. Companies make entries for both cash and small stock dividends at the declaration date and at the payment date. At the declaration date the entries are: cash dividend—debit Cash Dividends and credit Dividends Payable; small stock dividend—debit Stock Dividends credit Paid-in capital in Excess of Par (or Stated) Value and credit Common Stock Dividends Distributable. At the payment ...