college accounting heintz & parry 20 th edition. chapter 21 corporations: taxes, earnings,...

College AccountingCollege Accounting

Heintz & ParryHeintz & Parry2020thth Edition Edition

Heintz & ParryHeintz & Parry2020thth Edition Edition

ChapterChapter 2121

Corporations: Taxes, Earnings, Distributions,

and the Retained Earnings Statement

Corporations: Taxes, Earnings, Distributions,

and the Retained Earnings Statement

1

Account for corporate

income taxes.

CORPORATE INCOME TAXESCORPORATE INCOME TAXES

• A disadvantage of corporations is that they must pay income taxes

• Corporations estimate their annual income and make quarterly payments

• At the end of accounting period, the actual amount of income tax is determined– If it differs from estimates, an adjusting

entry is made

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GENERAL JOURNALGENERAL JOURNAL

DATE DESCRIPTION PR DEBIT CREDIT

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EXAMPLE:If the corporation estimates its income

taxes for 20-1 will be $160,000…




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Income Tax Expense 40,000

Cash 40,000

…quarterly payments will be madeon April 15, June 15, September 15,

and December 15.($160,000 ÷ 4 = $40,000)




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Cash

The same entry ismade each quarter.

40,000




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At the end of the year, actual incometaxes are calculated as $163,000,or $3,000 more than estimated.

An adjusting entry is needed.


Income Tax Payable 3,000




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Income Tax Payable 3,000

Cash 3,000

An additional $3,000 is paid when a tax return is filed in the following period.

2

Explain the use of the

retained earnings account.

THE RETAINED EARNINGS ACCOUNTTHE RETAINED EARNINGS ACCOUNT

Retained Earnings

Very few transactionsaffect the retainedearnings account.


Retained Earnings

Usually the onlycredit is for net income.

Net income


Retained Earnings

There are only three types of debits.

Net incomeNet lossDividends (closing)

Appropriations

CASH DIVIDENDSCASH DIVIDENDS

EXAMPLE: On February 1, the board of directors declares a dividend of $4 per share

on 4,000 shares of preferred stock and a dividend of $2 per share on 10,000 shares of

common stock. Both dividends are payable on February 20 to stockholders of record on

February 10. DATE OF RECORD:Stockholders who own the

stock on the date of record will receive the dividend,

regardless of whether they owned the stock on the date of declaration or on the date of

payment.

SMALL STOCK DIVIDENDSMALL STOCK DIVIDEND

EXAMPLE: Diven Corp. has 4,000 share of $5 par common stock outstanding.

Diven declares a 10% stock dividend on March 5, payable on March 27 to

stockholders of record on March 14. The market value of Diven’s common stock

on the date of declaration is $12 per share.4,000

shares to be distributed 10%

400

APPROPRIATIONSAPPROPRIATIONS

EXAMPLE: Chem Corp. has decided to build a new waste treatment plant. Chem Corp. has a retained earnings balance of $900,000. To finance a portion of the plant (and to inform

people of its concern for the environment), the board of directors decides to appropriate $600,000 of retained earnings over a three-year

period.Let’s look atthe journal entry.

CLOSING ENTRIESCLOSING ENTRIES

1. Close revenue accounts to Income Summary– The same entry as sole proprietorships and

partnerships

2. Close expense accounts to Income Summary– The same entry as sole proprietorships and

partnerships

3. Close Income Summary to Retained Earnings– Credit balance in Income Summary = net

income – Debit balance in Income Summary = net loss

4. Close Dividends to Retained Earnings




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Income Summary 337,000

Retained Earnings

Closing Entry #3 EXAMPLE:The corporation has net income

of $337,000 for the period.

337,000




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Income Summary

52,000Retained Earnings

What if the corporationhas a net loss of $52,000?

52,000




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Dividends

30,000Retained Earnings

Closing Entry #4 EXAMPLE:The corporation declares

$30,000 in dividends.

30,000

3Account for dividends and

stock splits.


• A distribution of corporate assets (cash) to stockholders

• To be issued if corporation has:– Unrestricted retained earnings– An adequate cash balance– Declared a cash dividend

• Only the board of directors can declare a dividend

• Three key dates:– Date of declaration– Date of record – Date of payment


EXAMPLE: On February 1, the board of directors declares a dividend of $4 per share on 4,000

shares of preferred stock, and a dividend of $2 per share on 10,000 shares of common stock. Both dividends are payable on February 20 to

stockholders of record on February 10.

DATE OF DECLARATION:

4,000 shares $4$16,000

10,000 shares

$2$20,000

Preferred Stock Common Stock




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Cash Dividends 16,000

Preferred Dividends Payable

Separate entries are madefor each type of stock.

16,000

Feb. 1

1 Cash Dividends

Common Dividends Payable

20,000

20,000

20--




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16,000Preferred Dividends Payable

Date of Payment

16,000

Feb. 20

20 Common Dividends Payable 20,000

20,000

Cash

Cash

20--




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Cash Dividends xxx

Dividends Payable xxx

Dividends Payable

Cash

xxx

xxx

How do cashdividend entries affect

total assets?




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Cash Dividends xxx


Dividends Payable

Cash

xxx

xxx

Total assetsdecrease




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Cash Dividends xxx


Dividends Payable

Cash

xxx

xxx

How do cash dividend entries affectpaid-in capital?




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Cash Dividends xxx


Dividends Payable

Cash

xxx

xxx

No effect




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Cash Dividends xxx


Dividends Payable

Cash

xxx

xxx

How do cash dividend entries affectretained earnings?




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Cash Dividends xxx


Dividends Payable

Cash

xxx

xxx

Decrease (remember the Cash Dividends account

is closed to Retained Earnings).

STOCK DIVIDENDSSTOCK DIVIDENDS

• A proportionate distribution of shares of a corporation’s own stock to its stockholders

• Several reasons for this type of dividend:– The company may be short of cash– The company may want to increase the

marketability of its shares by lowering the price per share

– The corporation may want to transfer a portion of retained earnings to a paid-in capital category to indicate that it is unavailable for dividends

STOCK DIVIDENDSSTOCK DIVIDENDS

• Typically stated as a percentage of common stock outstanding

• The date of declaration journal entry varies depending on the dividend percentage– Dividends for less than 20–25% (small)

• Stock Dividend is debited for the market value of the stock

– Dividends for more than 20–25% (large)• Stock Dividend is debited for the par or stated value

of the stock

SMALL STOCK DIVIDENDSMALL STOCK DIVIDEND

EXAMPLE: Diven Corp. has 4,000 share of $5 par common stock outstanding.

Diven declares a 10% stock dividend on March 5, payable on March 27 to

stockholders of record on March 14. The market value of Diven’s common stock

on the date of declaration is $12 per share.

4,000

shares to be distributed 10%

400




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Stock Dividends 4,800

Small stock dividends:The stock dividend account is debited

for the market value of the sharesto be distributed.

(400 shares $12 market value)

Mar. 520--




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Stock Div. Distributable

Stock Dividends Distributable is credited for the par value.(400 shares $5 par value)

2,000

Mar. 520--




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The Stock Dividends Distributable account is credited for the par value and reported as an addition to common stock on the balance sheet.

The Paid-in Capital in Excess of Par account is credited for the difference between

market value and par value.

2,000

Mar. 5

Paid-In Capital in Excess

of Par—Common Stock 2,800

20--




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Stock Div. Distributable 2,000

Mar. 5


of Par—Common Stock 2,800

27 Stock Div. Distributable 2,000

Common Stock 2,000

The new shares of stock are distributed to stockholders on March 27.

20--




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Stock Dividends xxx


Distribution of stock dividend (small)

to stockholders

xxxAt

declaration


of Par—Common Stock xxx




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Stock Dividends xxx

Stock Div. Distributable xxx

At distribution




Common Stock

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xxx

How do small stock dividend entries affect the assets?




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Stock Dividends xxx





Common Stock

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No effect




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Stock Dividends xxx





Common Stock

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How do small stock dividend entries affect total paid-in capital?




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Stock Dividends xxx





Common Stock

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Total paid-in capital is increased by market value.




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Stock Dividends xxx





Common Stock

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xxx

How do small stock dividend entries affect retained earnings?




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Stock Dividends xxx





Common Stock

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Retained earnings is decreased bymarket value (remember Stock Dividends

are closed to Retained Earnings).

LARGE STOCK DIVIDENDLARGE STOCK DIVIDEND

• Recorded similarly to the small stock dividend, except:– The stock dividend account is debited

for the par value instead of the market value

– Stock dividends distributable are recorded at par value

– Since both the debit and credit are the same (par value), there is no need for the paid-in capital in excess of par— common stock account




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Stock Dividends xxx


Distribution of stock dividend (large)

to stockholders

xxxAt

declaration




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Stock Dividends xxx


Atdistribution


Common Stock

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xxx

How do large stock dividend entries affect the assets?




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Stock Dividends xxx



Common Stock

xxx

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No effect




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Stock Dividends xxx



Common Stock

xxx

xxx

How do large stock dividend entriesaffect paid-in capital?




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Stock Dividends xxx



Common Stock

xxx

xxx

Increase bypar value




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Stock Dividends xxx



Common Stock

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xxx

How do large stock dividend entries affect retained earnings?




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Stock Dividends xxx



Common Stock

xxx

xxx

Decrease by par value

STOCK SPLITSSTOCK SPLITS

• The exchange of one share of an old issue of stock for multiple shares of a new issue with a reduced par or stated value– Example: Splice Corp. has 10,000 shares of

$10 par common stock outstanding. Splice declares a two-for-one stock split

• Why?—To improve marketability of the shares by reducing par value, leading to wider ownership of the stock

• Each shareholder will receive two shares of the new $5 par value stock in return for each share of the old $10 par value stock




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Memo notation

Stock split:The exchange of old stock formultiple shares of new stock

No journal entry; justa memo in the journal




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Memo notation

Because there is no entry, there is no effect on assets, paid-in capital, or

retained earnings.

4

Account for appropriations

of retained earnings.


• A restriction of retained earnings by the board of directors for a specific purpose

• Used primarily to limit the availability of retained earnings for paying dividends

• Does not affect total retained earnings– Just separates it into “appropriated” and

“unappropriated”

• Does not affect cash or other assets


EXAMPLE: Chem Corp. has decided to build a new waste treatment plant. Chem Corp. has a retained earnings balance of $900,000. To finance a portion of the plant (and to inform

people of its concern for the environment), the board of directors decides to appropriate $600,000 of retained earnings over a three-year

period.Let’s look atthe journal entry.




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Retained Earnings

$600,000 ÷ 3 years The same entry is made at theend of each of the three years.

Retained Earnings Approp.

for Treatment Plant

200,000

200,000


Retained Earnings Section of the Balance Sheet

Retained earnings:Appropriated for treatment plant $200,000Unappropriated 700,000Total retained earnings $900,000




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Retained Earnings Approp.

for Treatment Plant

After the treatment plant is completed, the appropriation

is no longer needed.

Retained Earnings

600,000

600,000

5

Prepare a retained

earnings statement.


$1,100,000Retained earnings, January 1

$30,000

Add net income for the year 280,000

Less: Cash dividendsStock dividends 20,000 50,000

Retained earnings, December 31

$1,380,000

$1,330,000

Similar to the statement of owner’s equity

Sample Corporation Retained Earnings Statement

For Year Ended December 31, 20--

Sample Corporation Retained Earnings Statement

For Year Ended December 31, 20--


$200,000Appropriated:

$700,000

Appropriated for treatment plant, Jan. 1200,000

Retained earnings appropriated, Dec. 31Unappropriated:

280,000

200,000

Balance, January 1

$ 400,000Current year appropriation (see below)

Add net income for the yearLess: Cash dividends $ 30,000

$980,000

Stock dividends 20,000Transfer to approp. for treatment plant 250,000Ret. earnings unappropriated, Dec. 31 730,000

Total retained earnings, December 31 $1,130,000

Chem Corporation Retained Earnings Statement For Year Ended December 31, 20-2


Appropriated retained earnings are presented first, followed by

unappropriated.


$200,000Appropriated:

$700,000

Appropriated for treatment plant, Jan. 1200,000

Retained earnings appropriated, Dec. 31Unappropriated:

280,000

200,000

Balance, January 1

$ 400,000Current year appropriation (see below)

Add net income for the yearLess: Cash dividends $ 30,000

$980,000

Stock dividends 20,000Trans. to approp. for treatment plant 250,000Ret. earnings unappropriated, Dec. 31 730,000

Total retained earnings, December 31 $1,130,000



Current year appropriations are shown twice.

college accounting heintz & parry 20 th edition. chapter 21 corporations: taxes, earnings,...

Documents

income tax expense3

annual income

income taxescorporations

accessible website

date of record

shares of common stock

tax return

shares of preferred