Retained Earnings,

Treasury Stock, and

the Income Statement
Retained Earnings
 Accumulates income that has been retained in
the business (that is, not paid out in dividends to
stockholders) over life of business.
 All net income minus net losses minus
dividends
 Negative balance in Retained Earnings - deficit
 Not a fund of cash
Objective 1
Account for stock dividends.
Stock Dividend
 Proportional distribution of corporation’s
own stock to shareholders (10%)
 Does not change total stockholders’ equity
 Transfer of retained earnings to
contributed capital
Entries for Stock Dividend
Small Large
 Distribution is < 25% of previously
 Distribution
outstanding
is > 25% of
shares. previously outstanding
 Debit retained earnings forshares.
market value of
shares to be distributed  Debit retained earnings
for par or stated value
of shares.
Small Stock Dividend Example
San Diego Company, with 300,000 shares of
$2 par value common stock outstanding,
declares a 15% stock dividend when the
shares are trading at $20.
Small Stock Dividend Example
How much stock do the shareholders
receive?
 300,000 × 15% = 45,000 shares
 Small Stock Dividend Example
General Journal
Date Accounts and Explanations PR Debit Credit
Dec 31 Retained Earnings 900,000
Common stock 90,000
Paid in capital in excess of par,
common 810,000
15% stock dividend distributed

USE MARKET
USE PARVALUE
Common45,000
stockshares x $20
= 45,000 shares x $2
Large Stock Dividend Example
San Diego Company, with 300,000 shares of
$2 par value common stock outstanding,
declares a 40% stock dividend when the
shares are trading at $20.
Large Stock Dividend Example
 How much stock do the shareholders
receive?
 300,000 × 40% = 120,000 shares
 Large Stock Dividend Example

General Journal
Date Accounts and Explanations PR Debit Credit
Dec 31 Retained Earnings 240,000
Common stock 240,000
40% stock dividend distributed

USE PAR
120,000 shares x $2
Stock Split Example
San Diego Company had 500,000 shares of $10
par common stock authorized and 100,000
issued. A 5-for-1 stock split was declared.
 After the split, how many shares are
 Authorized? 500,000 x 5 = 2,500,000
 Issued? 100,000 x 5 = 500,000
 What is the par value per share? $10 ÷ 5 = $2

Why do companies perform Stock Splits???

 Stock split
 No formal entry is made, but a memo entry
is prepared in the journal.
General Journal
Date Accounts and Explanations PR Debit Credit
Dec 31 Memo: Called in the outstanding $10
par common stock and distributed 5
shares of $2 par ($10/5) common
stock for each old share. Now
500,000 shares are outstanding.
Objective 2
Distinguish stock splits from stock dividends.
Similarities Between Stock
Splits and Stock Dividends
 Both increase number of shares of stock
owned per stockholder.
 Neither type of income creates taxable
income for investor.
Differences Between Stock
Splits and Stock Dividends
Stock Split:
Dividend:
 affects
shifts amounts
no account
frombalance.
retained earnings to paid-in
 capital.
Changes par value
 par
 value per
Increases shareofremains
number unchanged.
shares of stock authorized,
issued, and outstanding.
Objective 3
Account for treasury stock.
Treasury Stock...
 Shares that a company has issued and
later reacquired
 Purchasing treasury stock decreases
assets and stockholders’ equity
 Purchasing Treasury Stock
On May, 8, 2002, Whitt, Inc. purchased
2,000 of its own shares of stock in the
open market for $8,000.
General Journal
Date Accounts and Explanations PR Debit Credit
May 8 Treasury stock, common 8,000
Cash 8,000

Keep track of the cost per share: $8,000 / 2,000 = $4

 Selling Treasury Stock at Cost
On June 30, 2002, Whitt sold 100 shares of
its treasury stock for $4 per share.
General Journal
Date Accounts and Explanations PR Debit Credit
Jun 30 Cash 400
Treasury stock, common 400
 Selling Above Cost
On July 19, Whitt sold an additional 500
shares of its treasury stock for $8 per
share.
General Journal
Date Accounts and Explanations PR Debit Credit
Jul 19 Cash 4,000
Treasury stock, common 2,000
Paid in capital-treasury stock 2,000
500 X $4 original cost
 Selling Below Cost
On August 27, Whitt sold an additional 400
shares of its treasury stock for $1.50 per
share.
General Journal
Date Accounts and Explanations PR Debit Credit
Aug 27 Cash 600
Paid in capital – treasury stock 1,000
Treasury stock, common 1,600

400 X $4 original cost

Retirement of Stock...
 Decreases outstanding stock
 Retired shares cannot be reissued
 There is no gain or loss on retirement
Objective 4
Report restrictions on retained earnings.
Restrictions on Retained
Earnings
 Reported in notes to financial statements
 Appropriations are restrictions on retained
earnings that are recorded by formal
journal entries