chapter 14.docx

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University of Toronto Scarborough
Financial Accounting
Mark Fitzpatrick

Dividends - A distribution of a corporation’s retained earnings to shareholders - Most often cash, but can also be stock Cash Dividends - Distribution of cash to shareholders - Corporation must have enough retained earnings in order to pay dividends – dividends are distributed from retained earnings - Corporations must also have enough cash because a lack of cash means that the company cannot give out cash dividends - The board of directors must formally declare dividends - Once declared, the dividends become payable to shareholders - Dividends are not required by any laws or regulations Journalizing Cash Dividends 1. Declaration Date – the formal declaration of dividends by the board of directors – legally binds the corporation to pay dividends – often to preferred shareholders, but if to common shareholders, preferred shareholders still hold priority DR Cash Dividends – Preferred/Common (depending on situation), CR Dividends Payable (number of shares on the market X amount per-share of dividend) – Dividends Payable are recorded as current liabilities 1. Record Date – corporations determine who is going to receive dividends No entry required because there is no change financially 1. Payment Date – dividends are mailed out to shareholders DR Dividends Payable, CR Cash - The declaration of cash dividends decreases shareholders’ equity and increases liabilities - The payment of cash dividends decreases both assets and liabilities - Overall effect of dividends: decreases shareholders’ equity (through Retained Earnings) and decreases assets (through cash) Stock Dividends - Distribution of the corporation’s own shares to shareholders - Similar to cash dividends except stocks are used rather than cash - Decreases retained earnings but increases share capital - Does not change total shareholders’ equity - Shareholders retain the same percentage of ownership - Simply an increase in the number of stocks on the market - Corporations often give out stock dividends to: - Satisfy shareholders’ dividend expectations without giving cash - Increase marketability of shares – more shares on the market means lower market price – making stocks more affordable - Emphasize a portion of shareholders’ equity has been permanently retained and not available to be distributed as cash Journalizing Stock Dividends 1. Declaration Date – DR Stock Dividends – Common, CR Common Stock Dividends Distributable Amount of the entry is equal to the number of stocks being issued multiplied by the market value per share on the date of declaration, NOT payment or record date 1. Record Date – same as cash dividends, no entry required 2. Payment Date – DR Common Stock Dividends Distributable, CR Common Shares - Effect of stock dividends: Increase common shares account, increased number of common shares, decrease retained earnings account, no change in total shareholders’ equity Stock Splits - Issue of additional shares to shareholders based on their percentage ownership - Increases marketability of shares to investors - Number of shares is increased proportionate to a specified number - Only changes the number of shares – does not affect common shares or retained earnings - Reduces the average market value of the share - No journal entry required – only a memo is needed Effects of Dividends Cash Dividend: Decreases assets through cash and decrease shareholders’ equity through retained earnings Stock Dividend: No overall change to shareholders’ equity but increases share capital and decreases retained earnings Stock Split: No change to anything Corporate Income Taxes - Income tax appears on both the income statements as an expense and on the balance sheets as a payable to the government - Estimates of income tax must be made during the fiscal period - An adjusting entry at the end of the period is made to update the income tax expense and reconcile the estimated amount to the actual amount - Interperiod Tax Allocation: dividing tax expenses between amounts
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