Statement of Retained

Earnings

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 Statement of Retained Earnings
Retained earnings is the total cumulative amount of
reported net income less any net losses and dividends
declared since the company started operating.

Restricted Retained Earnings

Legal Restriction Contractual Restriction
Most states restrict Loan agreements
the amount of can include
treasury stock restrictions on paying
purchases to the dividends below a
amount of retained certain amount of
earnings. retained earnings.
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Dividends

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Cash Dividends
Regular cash dividends provide a return to investors and
almost always affect the stock’s market value.

Dividends Stockholders
Corporation
%o f Co rpo ra tio ns Pa ying Dive nds
To pay a cash dividend, the 100%
corporation must have: 75%
80%
1. A sufficient balance in 60%
retained earnings; and 40%
22%
2. The cash necessary to pay 20%
the dividend. 0%
Co mmo n Pre fe rre d
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Accounting for Cash Dividends

Three Important Dates

Date of Declaration Date of Record Date of Payment

Record liability No entry Record payment of

for dividend. required. cash to stockholders.

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Accounting for Cash Dividends

On January 9, a $1 per share cash dividend is declared
on Z-Tech, Inc.’s 5,000 common shares outstanding. The
dividend will be paid on February 1 to stockholders of
record on January 22.
Date of Declaration
Record liability
for dividend.

Dr Cr
Jan. 9 Retained Earnings 5,000
Common Dividend Payable 5,000
Declared $1 per share cash dividend.
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Accounting for Cash Dividends

On January 9, a $1 per share cash dividend is declared
on Z-Tech, Inc.’s 5,000 common shares outstanding. The
dividend will be paid on February 1 to stockholders of
record on January 22.
No entry required on January 22, the date of record.
Date of Payment
Record payment of cash to stockholders.

Dr Cr
Feb. 1 Common Dividends Payable 5,000
Cash 5,000
Paid $1 per share cash dividend.
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Deficits and Cash Dividends

A deficit is created when a company incurs
cumulative losses or pays dividends greater
than total profits earned in other years.
Sto c kho ld e rs' Eq uity
Co mmo n sto c k $10 p a r va lue ,
5,000 sha re s a utho rize d a nd o utsta nd ing $ 50,000
Re ta ine d e a rning s d e fic it (6,000)
To ta l sto c kho ld e rs' e q uity $ 44,000

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Stock Dividends
A distribution of a corporation’s own shares to its stockholders
without receiving any payment in return.
Why a stock dividend?
 Can be used to keep the market price on the stock affordable.
 Can provide evidence of management’s confidence that
the company is doing well.
Small Stock Dividend
Distribution is £ 25% of the previously outstanding shares.
Large Stock Dividend
Distribution is > 25% of the previously outstanding shares.

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Recording a Small Stock Dividend

Quest has 10,000 shares of $1 par value stock outstanding. On December
31, Quest declared a 10% stock dividend, when the stock was selling for
$15 per share. The stock will be distributed to stockholders on January 20.
Let’s prepare the December 31 entry.

Capitalize retained earnings for the market

value of the shares to be distributed.
(10,000 × 10% = 1,000 × $15 = $15,000)
1,000 × $10 par
Dec. 31 Retained Earnings 15,000
Common Stock Dividend Distributable 10,000
Paid-In Capital in Excess
of Par Value 5,000
Declared a 1,000 share (10%) stock dividend.

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Before the
stock
dividend.

After the
stock
dividend.

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Recording a Small Stock Dividend

Quest has 10,000 shares of $1 par value stock outstanding. On December
31, Quest declared a 10% stock dividend, when the stock was selling for
$15 per share. The stock will be distributed to stockholders on January 20.
Let’s prepare the January 20 entry.

Jan. 20 Common Stock Dividend Distributable 10,000

Common Stock $10 Par Value 10,000
Paid-In Capital in Excess

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Recording a Large Stock Dividend

Quest, Inc. has 10,000 shares of $1 par value stock
outstanding. On December 31, Quest declared a 30% stock
dividend. The stock will be distributed to stockholders on
January 20, 2014. Let’s prepare the December 31 entry.

Capitalize retained earnings for the minimum amount required

by state law, usually par or stated value of the shares.
(10,000 × 30% = 3,000 shares × $10 par value = $30,000)

Dr Cr
Dec. 31 Retained Earnings 30,000
Common Stock Dividend Distributable 30,000
Declared a 10,000 share (30%) stock dividend.
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 NEED-TO-KNOW
A company began the current year with the following balances in its Stockholders’ Equity accounts.

Common Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding $2,000
Paid-in capital in excess of par, Common Stock 1,000
Retained earnings 5,000
Total $8,000

All outstanding common stock was issued for $15 per share when the company was created. Prepare
journal entries to account for the following transactions during the current year.

Jan. 10 The board declared a $0.10 cash dividend per share to shareholders of record on Jan. 28.
Feb. 15 Paid the cash dividend declared on January 10.
Mar. 31 Declared a 20% stock dividend. The market value of the stock is $18 per share.
May 1 Distributed the stock dividend declared on March 31.
Dec. 1 Declared a 40% stock dividend. The market value of the stock is $25 per share.
Dec. 31 Distributed the stock dividend declared on December 1.

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 NEED-TO-KNOW
Common Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding $2,000
Paid-in capital in excess of par, Common Stock 1,000
Retained earnings 5,000
Total $8,000

Jan. 10 The board declared a $0.10 cash dividend per share to shareholders of record on Jan. 28.
Feb. 15 Paid the cash dividend declared on January 10.
Mar. 31 Declared a 20% stock dividend. The market value of the stock is $18 per share.
May 1 Distributed the stock dividend declared on March 31.
Dec. 1 Declared a 40% stock dividend. The market value of the stock is $25 per share.
Dec. 31 Distributed the stock dividend declared on December 1.

General Journal Debit Credit

Jan. 10 Retained earnings (200 shares x $0.10) 20
Common dividend payable 20

Jan. 28 No journal entry on the date of record

Feb. 15 Common dividend payable 20

Cash 20

Mar. 31 Retained earnings (200 shares x 20% = 40 shares x $18 mkt.) 720
Common Stock dividend distributable (40 shares x $10 par) 400
Paid-in Capital in excess of par value, Common Stock 320

May 1 Common Stock dividend distributable (40 shares x $10 par) 400
Common Stock, $10 par value (40 shares x $10 par) 400

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 NEED-TO-KNOW
Common Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding $2,000
Paid-in capital in excess of par, Common Stock 1,000
Retained earnings 5,000
Total $8,000

Jan. 10 The board declared a $0.10 cash dividend per share to shareholders of record Jan. 28.
Feb. 15 Paid the cash dividend declared on January 10.
Mar. 31 Declared a 20% stock dividend. The market value of the stock is $18 per share.
May 1 Distributed the stock dividend declared on March 31.
Dec. 1 Declared a 40% stock dividend. The market value of the stock is $25 per share.
Dec. 31 Distributed the stock dividend declared on December 1.
General Journal Debit Credit
May 1 Common Stock dividend distributable (40 shares x $10 par) 400
Common Stock, $10 par value (40 shares x $10 par) 400

Dec. 1 Retained earnings (240 shares x 40% = 96 shares x $10 par) 960
Common Stock dividend distributable (96 shares x $10 par) 960

Dec. 31 Common Stock dividend distributable (96 shares x $10 par) 960
Common Stock, $10 par value (96 shares x $10 par) 960

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 Retained Earnings Statement
Opening Balance of Reined earnings, Dec. 31, 2019 750,000

Net Income for the year 2020 280,000

Sub total 1,030,000
Less: Dividends
Cash Dividend on preferred stock ($8 per share) 15000
Cash Dividend on common share ($2 per share) 59,600
10% Stock Dividend 140,000
214,600
Closing Balance Retained Earnings, Dec 31, 2020 815,400

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