F1 M4

Look at each item given and decide how it affects retained earnings: income since incorporation equals unadjusted ending retained earnings (RE), that is, current year income is included; cash dividends is a direct deduction from RE on the date of declaration; property dividends are deducted from RE at market value on the date of declaration; the excess proceeds from the sale of treasury stock is considered additional paid-in capital. Thus: Ending retained earnings = Unadjusted retained earnings − Cash dividends − Property dividends = $420,000 - $130,000 − $30,000 = $260,000.

Two factors will affect retained earnings as a result of this transaction. Nilo will recognize a gain on disposition of marketable securities as well as a dividend, as follows:

So what does Cobb report as dividend income?

• After the stock dividend, Cobb has 10,000+2,000=12,00010,000+2,000=12,000 shares.

• Cash dividend per share = $1.50

• Total dividend income = 12,000×1.50=18,00012,000×1.50=18,000

Answer: Cobb reports $18,000 as dividend income.

Rule: The difference between book value and fair market value of the property dividend should be recorded as gain/loss on disposal of asset.

Sure! Here’s the question simplified:

• Cobb Co. owns 10,000 shares of Roe Co., which is 2% of Roe’s total shares.

• Roe Co. gave Cobb Co. a stock dividend of 2,000 shares. That means Cobb got more shares, but no cash.

• Later, Roe Co. paid a cash dividend of $1.50 per share.

The question: How much dividend income should Cobb report on its income statement?

Key point:

• Stock dividends don’t count as income because you just get more shares, not cash. They don’t increase your earnings.

• Cash dividends do count as income.

How to calculate Cobb’s dividend income:

1. Original shares: 10,000

2. Stock dividend shares: 2,000

3. Total shares after stock dividend = 10,000 + 2,000 = 12,000 shares

4. Cash dividend received per share = $1.50

5. Total cash dividend income = 12,000 shares × $1.50 = $18,000

So, Cobb reports $18,000 dividend income.

Why not include stock dividends?
Because you didn’t get cash, just more shares. No income is recognized at the time of stock dividends.

Sure! Here’s a simple breakdown:

• Mio owns all the shares of another company, Plasti.

• Mio decides to give its own stockholders a property dividend—not cash, but shares of Plasti stock.

• Plasti has 2,000 shares outstanding with a $1 par value each.

• On the date of the dividend declaration, Plasti’s book value per share is $1.50.

• Right after the dividend is declared, the market value per share of Plasti stock jumps to $4.50.

What Mio reports as a gain:

• Mio started with an investment in Plasti valued at the book value of 2,000×1.50=3,0002,000×1.50=3,000.

• Because the shares are now worth their market value of 2,000×4.50=9,0002,000×4.50=9,000, Mio has effectively gained value.

• The difference between the market value and the book value is the gain on the disposal of the Plasti stock:

9,000−3,000=6,0009,000−3,000=6,000

So, Mio reports a $6,000 gain in its financial statements.

Why?

When a company gives a property dividend, it treats the distribution like a sale (disposal) of that property. The gain or loss is the difference between what the company originally recorded the asset as (book value) and its fair market value at the time of distribution.

• The dividend declaration date (October 25) is when the company’s board officially decides to pay dividends. This decision creates a liability (the company now owes money to shareholders).

• The date of record (November 15) is just the date they check who owns the shares to know who will get the dividend. No accounting entry happens here.

• The payment date (December 29) is when the company actually pays the cash and settles the liability.

A liability is created when a dividend is declared. Since the dividend was declared after the balance sheet date but before the financial statements, this is an example of a nonrecognized subsequent event. Even though the dividend relates to Year 1 earnings, it was not declared until February 4, Year 2, and, therefore, a liability should not be recorded in the December 31, Year 1, financial statements. The event should be disclosed in the notes to the financial statements, but does not require reduction of retained earnings or recognition of a liability.

What’s given?

• Starting assets: $600,000

• Starting liabilities: $400,000

• So, starting equity = Assets - Liabilities = $600,000 - $400,000 = $200,000

• During the year:

  • Credit sales (revenue) = $250,000 (This means the company sold goods/services and expects to collect $250,000, but only $8,000 is still owed at year-end)

  • Expenses = $90,000 (includes expenses paid and unpaid)

  • Stock dividend declared and issued = $10,000 (this is giving shareholders more stock but not taking money out of equity)

What do we want?

• The year-end balance of total equity after these transactions.

Step 1: Calculate net income

• Revenue (sales): $250,000

• Expenses: $90,000

• So, Net Income = Revenue - Expenses = $250,000 - $90,000 = $160,000

This increases equity because net income flows into retained earnings.

Step 2: Add net income to beginning equity

• Beginning equity = $200,000

• Plus net income = $160,000

• Equals: 200,000+160,000=360,000200,000+160,000=360,000

Step 3: What about the stock dividend?

• A stock dividend is just giving shareholders more shares; it doesn’t reduce total equity. Instead, it transfers some amount from retained earnings to paid-in capital, so total equity stays $360,000.

Final answer:

• Total equity at year-end = $360,000

Sure! Here’s a simple breakdown of what’s happening with the retained earnings calculation:

1. Starting point:
   The company had $600,000 in retained earnings at the end of Year 2.

2. Net Income:
   They earned $400,000 during Year 3. This adds to retained earnings:
   600,000+400,000=1,000,000600,000+400,000=1,000,000.

3. Stock Dividend:
   They declared and issued a stock dividend worth $150,000.

   • A stock dividend reduces retained earnings because it’s like giving out company ownership to shareholders instead of cash.

   • Since it’s a small stock dividend (under 20-25%), you reduce retained earnings by the fair value, which is $150,000 here.
     So:
     1,000,000−150,000=850,0001,000,000−150,000=850,000.

4. Stock Repurchase (Constructive Retirement):
   They bought back 2,000 shares initially issued at $100 par, but repurchased at $90 per share (less than par).

   • Since the repurchase price is less than the par value, retained earnings are not reduced.

   • The difference affects paid-in capital accounts but does not affect retained earnings here.

Final retained earnings at December 31, Year 3 = $850,000

Why some answers are wrong:

• Ignoring the stock dividend (keeping $1,000,000) misses the dividend reduction.

• Reducing retained earnings for the difference between par and repurchase price is wrong because that difference does not affect retained earnings in this case.

• Adding back the difference as if it was income is also incorrect.

Sure! Here's a simple breakdown of the question about Rudd Corp.’s common stock outstanding:

1. Starting point:
   At the end of Year 1, Rudd Corp. had 300,000 shares outstanding.

2. January 31 – 10% stock dividend declared:
   A 10% stock dividend means they give shareholders extra shares equal to 10% of what they already have.
   So, 10%×300,000=30,00010%×300,000=30,000 new shares were issued.
   Total shares outstanding now = 300,000+30,000=330,000300,000+30,000=330,000.

3. June 30 – Purchased 100,000 shares (Treasury shares):
   The company buys back 100,000 shares and holds them as treasury stock (not outstanding anymore).
   So, subtract 100,000 shares:
   Outstanding shares = 330,000−100,000=230,000330,000−100,000=230,000.

4. August 1 – Reissued 50,000 shares:
   The company sold or gave back 50,000 of those treasury shares, increasing shares outstanding.
   Outstanding shares = 230,000+50,000=280,000230,000+50,000=280,000.

5. November 30 – 2-for-1 stock split:
   A stock split doubles the number of shares each shareholder has, so multiply by 2.
   Outstanding shares = 280,000×2=560,000280,000×2=560,000.

Final answer: Rudd Corp. has 560,000 shares outstanding at December 31, Year 2.

What do these words mean?

• Issued shares: All the shares the company has ever sold (includes shares the company still holds).

• Treasury shares: Shares the company bought back and holds itself (not owned by anyone else).

• Outstanding shares: Shares actually owned by people outside the company (issued shares minus treasury shares).

Starting point (Dec 31, Year 1):

• Total issued shares = 125,000

• Treasury shares = 25,000 (company’s own shares)

• Outstanding shares = 125,000 - 25,000 = 100,000 (shares owned by others)

Moves during the year:

1. Give 13,000 treasury shares to officers:

• Treasury shares go down: 25,000 - 13,000 = 12,000

• Outstanding shares go up: 100,000 + 13,000 = 113,000

• Issued stays the same: 125,000

2. 3-for-1 stock split:

• Multiply all shares by 3:
  Issued = 125,000 × 3 = 375,000
  Treasury = 12,000 × 3 = 36,000
  Outstanding = 113,000 × 3 = 339,000

3. Company buys 5,000 of its own shares:

• Treasury shares increase: 36,000 + 5,000 = 41,000

• Outstanding shares decrease: 339,000 - 5,000 = 334,000

• Issued shares still the same: 375,000 (because these shares were already issued)

Final numbers:

• Issued shares: 375,000 (all shares ever sold)

• Outstanding shares: 334,000 (shares actually owned by people outside company)

Summary:
Issued shares don’t change unless new shares are sold or retired. Treasury shares come from issued shares but don’t count as outstanding. Stock splits multiply everything. Buying back shares moves shares from outstanding to treasury but doesn’t change issued.

1. Starting point (January 1):

   • Issued shares = 110,000 (the company has legally issued this many shares)

   • Outstanding shares = 100,000 (shares actually held by investors, after subtracting treasury stock)

2. Transactions during the year:

   • March 1: Issued 15,000 new shares — so more shares are now owned by investors.

   • June 1: Resold 2,500 treasury shares — treasury shares are shares the company previously bought back; once resold, these are again considered outstanding.

   • Before split, the total outstanding shares are:100,000+15,000+2,500=117,500 shares100,000+15,000+2,500=117,500 shares

3. September 1: 2-for-1 stock split (each share splits into 2 shares)

   • This doubles the number of outstanding shares:117,500×2=235,000 shares outstanding117,500×2=235,000 shares outstanding

Final answer: The company has 235,000 shares outstanding at the end of the year.

Why the split matters: A stock split increases the number of shares but doesn’t change ownership percentage or total value—just divides each share in two. So our calculation always doubles outstanding shares after the split.