chapter 21 corporate work sheets, taxes, and dividends

Chapter 21

Corporate Work Sheets, Taxes, and

Dividends

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Dividends for Stockholders at Sony Corporation

• Sony believes that continuously increasing corporate value and providing dividends is essential to rewarding stockholders.

• Dividends of 25 ¥ (yen) per share were paid to stockholders in fiscal year 2006.

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Corporate Income Taxes

• Because the corporation is a separate legal entity, it must pay federal and applicable state income taxes.

• Revenue – Expenses = Income Before Income Tax

• Income Before Income Tax × Tax Rate = Income Tax Expense


Procedure for Recording and Paying Income Taxes

• A corporation has to estimate the federal income tax that it will have to pay for the forthcoming year (pay-as-you-go basis).

• The estimate is paid in four quarterly installments.

• The entry when each installment is paid is:– Debit to Income Tax Expense– Credit to Cash


Procedure for Recording and Paying Income Taxes (cont’d)

• At the end of the year, when the exact amount of taxable income is known, an adjusting entry is made.

– If underpaid:• Debit to Income Tax Expense• Credit to Income Tax Payable (current liability

account; the liability must be paid within 2 ½ months)

– If overpaid:• Debit to Prepaid Income Tax (current asset

account)• Credit to Income Tax Expense


Corporate Income Tax Rates Used in This Text

• A 5 percent surtax is imposed on income between $100,000 and $335,000.

– In effect, the addition of the surtax causes corporations with taxable income above $335,000 to pay a flat 34 percent rate on all taxable income.


Calculating Corporate Income Taxes: Examples


Taxable Income x Flat Rate = Total Tax$468,000.00 x 34% = $159,120.00

Or: Since the taxable income is above $335,000, use the flat tax rate of 34%

Calculating Corporate Income Taxes: Examples (cont’d)


Example of Income Tax Entries for a Corporation: First Year

Corporation Name: Blue MountainOperation Began: January 5, 20—Fiscal Year: Jan. 1 to Dec. 31Estimate of Year’s Taxable Income: $122,000.00

Tax on the first $50,000 $50,000.00 x 15% $ 7,500.00Tax on the next $25,000 $25,000.00 x 25% $ 6,250.00Tax on the next $47,000 $47,000.00 x 34% $15,980.00Surtax $22,000.00 x 5% $ 1,100.00Total estimated tax $30,830.00

Quarterly payments $30,830.00 ÷ 4 $ 7,707.50

Calculation of Total Tax and Quarterly Estimates


First of Four Equal Journal Entries

• Journal entries on June 15, September 15, and December 15 will be for the same amount.


Calculating the Actual Tax Due at the End of the Year

Corporation Name: Blue MountainOperation Began: January 5, 20—Fiscal Year: Jan. 1 to Dec. 31Actual Year’s Taxable Income: $128,000.00

Tax on the first $50,000 $50,000.00 x 15% $ 7,500.00Tax on the next $25,000 $25,000.00 x 25% $ 6,250.00Tax on the next $53,000 $53,000.00 x 34% $18,020.00Surtax $28,000.00 x 5% $ 1,400.00Total tax $33,170.00

Adjustment at end of year $33,170.00 - $30,830.00 $ 2,340.00

Calculation of Total Tax


End-of-Year Adjusting Entry


Steps for Journalizing the Closing Entries

1. Close revenue accounts into Income Summary.

2. Close expense accounts into Income Summary.

3. Close Income Tax Expense into Income Summary by the amount of the actual income tax for the year.– This procedure makes the amount of taxable income

more evident from a quick analysis of Income Summary.

4. Close Income Summary into Retained Earnings by the amount of the net income.


Closing Entries: An Abbreviated Example


Steps for Completing the Work Sheet

1. Record and total Trial Balance columns.2. Record all adjustments except income tax.3. Extend account balances into Income Statement

columns.4. Determine taxable income and calculate tax.5. Record adjustment for income tax, and complete

Adjustments columns totals.6. Record actual income tax in the Income Statement

columns, and complete the section.7. Extend account balances into Balance Sheet columns,

and total the columns.


Balances Extended into the Income Statement Columns


Determine Taxable Income and Calculate Tax

Calculate the tax adjustment for Step 5.

38,240.00$ - 34,730.00 = 3,510.00$


Partial Income Statement

Blue Mountain, Inc.


Income Statement Net Income Versus Taxable Income

Taxable income may vary greatly from the net income on the income statement because:

1. The depreciation methods used are different.

2. The items on the income statement are not deductible for tax purposes.

3. The company may capitalize expenditures on the financial statements, but may expense them on the tax return.


Appropriation of Retained Earnings

• The appropriation of Retained Earnings is the designation of a portion of Retained Earnings for a specific future purpose.

• The amount appropriated may not be used for cash or stock dividends.

• The amount appropriated does not represent a separate kitty or cash fund.

• By not paying out dividends from Retained Earnings, the corporation is preserving its net assets, particularly cash.


Process of Appropriation

The Board passes a resolution (recorded in the minutes of the meeting).

Minutes serve as the source documents for the accounting entry.


Unappropriated Retained Earnings

• The portion of Retained Earnings available for distribution as dividends to the stockholders

• Shown in the accounts as Retained Earnings


Entries for the Appropriation of Retained Earnings

To record the appropriation:– Debit Retained Earnings.– Credit Retained Earnings Appropriated for

__________ (some specific purpose).

Examples of purposes for appropriation:– Expansion of the corporation– Bonded indebtedness (an obligation imposed by

contract)– Self-insurance– Inventory losses (in the event of a price drop)– Contingencies (“rainy day” events)


Entries for the Appropriationof Retained Earnings: An Example

• Blue Mountain, Inc., plans to appropriate $50,000 of Retained Earnings each year for 12 years to construct its own building.


Entries to Reverse the Appropriation

• After 12 years, the company no longer needs to restrict the Retained Earnings.

– Blue Mountain has an additional $600,000 accumulated in net assets.– It can convert those net assets into cash to pay for the building.

• When the objective has been accomplished, the previous 12 entries are reversed.


Dividends Can Be Cash or Other Assets

• Distribution of a corporation’s earnings to stockholders in the form of cash– Reduces Retained

Earnings and overall stockholders’ equity

• Requires a sufficient balance in Unappropriated Retained Earnings

Cash Dividend

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Dates Related to Dividends

• Date of declaration– The date on which the board of directors votes to

declare dividends

• Date of record– The date as of which the ownership of shares is set

determining a person’s eligibility for dividends• Ordinarily about three weeks after the date of declaration

• Date of payment– The date on which dividends are paid


Journal Entries at Various Dates

1. Entry on date of declaration– Debit Retained Earnings.– Credit Dividends Payable.

2. Entry on date of record– No journal entry is made.

3. Entry on date of payment– Debit Dividends Payable.– Credit Cash.


Data for Dividend Entries

Amount of Dividend x

Shares Outstanding =

Total Cash Dividend

$0.91 x 5,000 = $4,550.00

Dividend Calculation

Amount of Dividend $0.91Shares Outstanding 5,000Date of Declaration Year 2, Jan. 20Date of Record Year 2, Feb. 11Date of Payment Year 2, Feb. 20

Bell Athletic Supply, Inc.


Date of Declaration


Date of Payment


Stock Dividend

• Distribution of a corporation’s retained earnings to stockholders in the form of shares of the corporation’s own stock on a pro rata (proportional) basis– Reduces Retained Earnings– Does not reduce overall stockholders’ equity

• (Transfers amounts from one equity account to another)

– Does not reduce assets– Has no effect on the proportionate share of ownership

held by an individual stockholder

• Usually issued by corporations that retain cash to finance future expansion


Stock Dividend Distributable

Stockholders’ equity account that represents total par value of the stocks to be issued

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Journal Entry for the Declaration of Small Stock Dividends (25% or Less)

• Debit Retained Earnings:– Number of Shares × Market Value per Share

• Credit Stock Dividend Distributable:– Number of Shares × Par or Stated Value per Share

• Credit Paid-in Capital in Excess of Par or Stated Value:– Difference between total market value and total par or

stated value


Journal Entry for LargeIssuance of Stock Dividends

• Debit Stock Dividend Distributable.

• Credit Common Stock.

• For stock dividends of more than 25 percent, use par value, not market value, for the debit to Retained Earnings.


Journal Entries for the Declaration and Issuance of Stock Dividends: An Example

Par Value of Common Stock $40.00Current Market Value $47.0010% Stock Dividend 10.00%Shares Outstanding 5,000Date of Declaration Year 3, Oct. 11Date of Record Year 3, Nov. 1Date of Issuance Year 3, Nov. 16

Bell Athletic Supply, Inc.


Journal Entries for the Declaration and Issuance of Stock Dividends: An Example

10% Stock Dividend x Shares Outstanding = Number of Shares in the Dividend10.00% x 5,000 = 500

Number of Shares in the Dividend x Current Market Value = Retained Earnings500 x $47.00 = $23,500.00

Number of Shares in the Dividend x Par Value of Common Stock = Stock Dividend Distributable500 x $40.00 = $20,000.00

Retained Earnings - Stock Dividend Distributable =Paid-in Capital in Excess of Par

Value$23,500.00 - $20,000.00 = $3,500.00

Retained Earnings (Debit)

Stock Dividend Distributable (Credit)

Paid-in Capital in Excess of Par Value (Credit)

Number of Shares in the Dividend


Date of Declaration


Date of Issuance


Reasons for Issuing Stock Dividends

1. To appease stockholders by giving them paper to hold onto

2. To reduce the per-share market value of the stock (increase in supply)– Lower prices may make the stock easier to sell.

3. To enable stockholders to postpone income tax liability until they sell the shares– Stock dividends are not considered income to the

recipients.


Liquidating Dividend

• Distribution of assets to stockholders when a corporation is going out of existence or is permanently reducing the size of its operation

• Reduces Paid-in Capital

• Reduces overall stockholders’ equity


Journal Entry for a Liquidating Dividend

• A corporation has returned all stockholders’ investments.


Stock Split

• A deliberate reduction of the par value or stated value of a corporation’s stock and the issuing of a proportionate number of additional shares

Number of Shares 10,000 x 2 = 20,000Par Value $50 x 1/2 = $25

2-for-1 Stock SplitStockholders get 2 shares (at 1/2 the value) for

every 1 share they hold


Journal Entry for a Stock Split


Minute Book

• A written narrative of all actions taken at official meetings of the board of directors

• Source document for dividend accounting entries


Statement of Retained Earnings for a Corporation

• Two sections– Unappropriated Retained Earnings

• Reflects the increases and decreases in the Retained Earnings account, consisting of net income, dividends, and transfers to appropriated Retained Earnings accounts

– Appropriated Retained Earnings• Lists each appropriated Retained Earnings

account, including additions or deductions affecting each account


Statement of Retained Earnings for a Corporation (cont’d)


Balance Sheet for a Corporation

• Stock Dividend Distributable is listed under Paid-in Capital directly below Common Stock.

• Dividends Payable and Income Tax Payable are listed under Current Liabilities.

• For donations:– Debit the asset.

– Credit Paid-in Capital from Donation.


Guidelines for Accounting Reports

• Full disclosure• Materiality • Conservatism

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Full Disclosure

An accounting rule requiring that financial statements and their accompanying notes contain all information that would influence a user’s understanding of a firm’s financial position


Materiality

An accounting rule that refers to the inclusion in financial statements of important items that significantly affect a firm’s financial position


Conservatism

An accounting rule that means that, when accountants are faced with major uncertainties as to which alternative accounting procedure to apply, they should choose the procedure that is least likely to overstate a firm’s revenues and assets or understate its expenses and liabilities

chapter 21 corporate work sheets, taxes, and dividends

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