continuing example 18 assume another year has passed and it is now december 31 2009 566878

Continuing Example 18, assume another year has passed, and it is now December 31, 2009. During 2009, Hoskins issued another 5,000 shares of stock at €12 per share, earned net income of €5,000, and paid dividends of €10,000. The shareholders’ equity section of the balance sheet of Hoskins on December 31, 2009, is as follows:

The €2,000 amount reported as total par value is the par value per share times the total number of shares issued, or €0.10 per share _ 20,000 shares. This €2,000 amount is the sum of the par value of 1,500 shares issued in 2008 plus the par value of 500 shares issued in 2009. The €208,000 amount reported as additional paid in capital (APIC) is the sum of the €148,500 of APIC from 2008 plus the €59,500 of APIC from the issuance of 5,000 shares in 2009 (_ €12 per share _ 5,000 shares minus €500 par value, or €60,000 _ €500). The increase in Hoskins’ share price, from €10 per share in 2008 to €12 per share in 2009, does not change the amount reported on the balance sheet for the 15,000 shares issued in 2008. The firm does not change the amounts reported for total paid in capital (par value and APIC) to reflect changes in share price; rather, those amounts reflect the share price at the time the firm originally issued the shares.23

Hoskins’ retained earnings at the end of 2009 of €15,000 is the cumulative undistributed earnings through its second year of operations, equal to the beginning of 2009 retained earnings of €20,000, plus 2009 earnings of €5,000, minus 2009 dividends of €10,000. Because dividends reduce retained earnings, not current earnings, a firm can declare and pay a dividend that exceeds its net income for the year. A firm could even pay dividends in a year that it generated a loss.