Identifying and Analyzing Financial Statement Effects of Dividends The stockhold

Question

Identifying and Analyzing Financial Statement Effects of Dividends The stockholders' equity of Kinney Company at December 31, 2013, is shown below. The following transactions, among others, occurred during 2014: Apr. 1 Declared and issued a 100% stock dividend on all outstanding shares of common stock. The market value of the stock was $11 per share. Dec. 7 Declared and issued a 4% stock dividend on all outstanding shares of common stock. The market value of the stock was $14 per share. Dec. 20 Declared and paid (1) the annual cash dividend on the preferred stock and (2) a cash dividend of 80 cents per common share. a. Use the financial statement effects template to indicate the effects of these separate transactions. b. Compute retained earnings for 2014 assuming that the company reports 2014 net income of $262,000.

Explanation / Answer

Answer a. Date Balance Sheet Income Statement Cash Asset + Non-Cash Asset = Liabilities + Contributed Capital + Retained Earnings Revenues - Expenses Apr-01           200,000         (200,000) Dec-07             67,200            (67,200) Dec-20        (124,840)         (124,840) 1. The large stock dividend is reflected as a reduction of Retained Earnings at the par value of the shares distributed (60,000 shares - 100% ´X $5 par value per share = $300,000). Common Stock is increased by the same amount. 2. This is a small stock dividend. As a result, Retained Earnings is decreased by the market value of the shares to be distributed (4% X 120,000 shares ´ $14 per share = $67,200). Common Stock is increased by the par value of the shares distributed (4% X 120,000 X $5 = $24,000) and additional paid-in-capital is increased by the balance ($43200). 3 Total Preferred Shares dividends = 5,000 Shares X $5 = $25,000 and Common Stock = 1248,000 X $0.80 = $99840. Retained Earnings and Cash are reduced to reflect the payment. Answer b. Calculation of Retained Earnings For the year ended Dec 31, 2014 Retained Earnings as on Dec 31, 2013          656,000 Add: Net Income earend during 2014 262000          918,000 Less: Cash Dividend Paid         (124,840) Less: Stock Dividend Paid         (267,200)       (392,040) Retained Earnings as on Dec 31, 2014          525,960

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