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LESSON 14-1

LESSON 14-1. Distributing Corporate Earnings to Stockholders. Financial Information. Management decisions about future business operations are often based on financial information This information show whether a profit is being made or a loss is being incurred

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LESSON 14-1

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  1. LESSON 14-1 Distributing Corporate Earnings to Stockholders

  2. Financial Information • Management decisions about future business operations are often based on financial information • This information show whether a profit is being made or a loss is being incurred • Profit or loss information helps an owner or manager determine future changes • Financial information is also needed to prepare required tax reports • Hobby Shack uses a fiscal year that begins on January 1 and ends on December 31 • Hobby Shack summarizes its financial information on December 31 of each year LESSON 14-1

  3. Stockholders’ Equity Accounts Used by a Corporation • A corporation’s ownership is divided into units • Each unit of ownership in a corporation is known as a share of stock • An owner of one or more shares of a corporation is known as a stockholder • Each stockholder is an owner of a corporation LESSON 14-1

  4. Stockholders’ Equity Accounts Used by a Corporation • Owner’s equity accounts for a corporation normally as listed under a major chart of accounts division title “Stockholders’ Equity” (pg. 231—Chapter 9) • Most corporations have many stockholders, and it is not practical to have a separate owner’s equity account for each stockholder • Instead a single owner’s equity account, title Capital Stock is used for the investment of all owners • A second stockholder’s equity account is used to record a corporation’s earnings • Net income increases a corporation’s total stockholder’s equity LESSON 14-1

  5. STOCKHOLDERS’ EQUITY ACCOUNTS USED BY A CORPORATION page 405 (3000) STOCKHOLDERS’ EQUITY 3110 Capital Stock 3120 Retained Earnings 3130 Dividends 3140 Income Summary • Capital Stock: single owner’s equity account (used for the investment of all owners) • Retained Earnings: an amount earned by a corporation and not yet distributed to stockholders (records a corporation’s earnings—can be used for business expansion or paid out to the stockholders) • Dividends: earnings distributed to stockholders (temporary account similar to a sole proprietor’s drawing account—closed to Retained Earnings at the end of a fiscal period) • Income Summary: temporary account used to summarize the closing entries for the revenue and expense accounts LESSON 14-1

  6. DECLARING A DIVIDEND • A group of persons elected by the stockholders to manage a corporation is called a Board of Directors • Dividends can be distributed to stockholders only by formal action of a corporation’s board of directors • Action by a board of directors to distribute corporate earnings to stockholders is called declaring a dividend • Dividends normally are declared on one date and paid on a later date • If a board of directors declares a dividend, the corporation is then obligated to pay the dividend LESSON 14-1

  7. DECLARING A DIVIDEND (accounts) • Dividends – “Debit” Normal Balance, Stockholders’ Equity account • Dividends Payable – “Credit” Normal Balance, Liability account LESSON 14-1

  8. DECLARING A DIVIDEND page 406 December 15. Hobby Shack’s board of directors declared a quarterly dividend of $2.00 per share; capital stock issued is 2,500 shares; total dividend, $5,000.00 ($2.00 x 2,500). Date of payment is January 15. Memorandum No. 79. 2 4 3 1 5 6 1. Write the date. 4. Write the debit amount. 2. Write the title of the account debited (Dividends). 5. Write the title of the account credited (Dividends Payable). 3. Write the memorandum number. 6. Write the credit amount. LESSON 14-1

  9. PAYING A DIVIDEND page 407 January 15. Paid cash for quarterly dividend declared December 15, $5,000.00. Check No. 379. 1 2 3 4 5 1. Write the date. 2. Write the account title. (Dividends Payable) 3. Write the check number. 4. Write the debit account. 5. Write the credit amount. (Cash) LESSON 14-1

  10. LESSON 14-2 Beginning an 8-Column Work Sheet for a Merchandising Business

  11. Entering a Trial Balance on a Work Sheet • To prepare a work sheet, a trial balance is first entered in the Trial Balance columns • ALL general ledger accounts and balances (even accounts without balances) are listed in the same order as they appear in the general ledger • Trial Balance columns are totaled to prove equality of debits and credits • A corporation’s accounts are similar to those a sole proprietorship except for the capital stock, retained earnings, dividends, andfederal income taxaccounts LESSON 14-1

  12. 1 2 RECORDING A TRIAL BALANCE ON A WORK SHEET page 410 1. Account title 2. Account balance 3. Total, prove, and rule the debit and credit columns 3 LESSON 14-1

  13. ANALYZING AND RECORDING ADJUSTMENTS • Some general ledger accounts need to be brought up to date before financial statements are prepared: • Supplies (same as for sole proprietorship—service business) • Prepaid Insurance (same as for sole proprietorship—service business) • Merchandise Inventory (unique to merchandising business) • Uncollectible Accounts Expense (both) • Depreciation Expense (both) • Federal Income Tax Expense (unique to corporations) • Adjustments recorded in a work sheet are for planning purposes only • The general ledger account balances are not changed until entries are journalized and posted (adjusting entries) LESSON 14-1

  14. Supplies Expense—Office Adj. (a) 2,730.00 Supplies—Office Dec. 31 Bal. 3,480.00 Adj. (a) 2,730.00 (Adj Bal. 750.00) Supplies Expense—Store Adj. (b) 2,910.00 Supplies—Store Dec. 31 Bal. 3,944.00 Adj. (b) 2,910.00 (Adj Bal. 1,034.00) ANALYZING AND RECORDING SUPPLIES ADJUSTMENTS page 411 Started with Used Have left Started with Used Have left LESSON 14-1

  15. 3 3 RECORDING SUPPLIES ADJUSTMENTS ON A WORK SHEET page 412 2 1 1. Write the debit amounts in the Adjustments Debit column. 2. Write the credit amounts in the Adjustments Credit column. 3. Label the two parts of the Supplies—Office adjustment with small letter a and small letter b in parentheses. LESSON 14-1

  16. 3 3 ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT page 413 1 2 1. Enter the amount of insurance used in the Adjustments Credit column. 2. Enter the same amount in the Adjustments Debit column. 3. Label the two parts of the adjustment with a small letter c in parentheses. LESSON 14-1

  17. LESSON 14-3 Planning and Recording a Merchandise Inventory Adjustment

  18. Merchandise Inventory • MerchandiseInventory is the amount of goods on hand for sale to customers • Merchandise Inventory is an ASSET account with a DEBIT normal balance • During a fiscal period/year, the amount of merchandise on hand increases each time merchandise is purchased • All purchases are recorded in the Purchase Account • All sales are recorded in the Sales Account • This makes it easier to determine the total purchases and sales during a fiscal period/year • The Merchandise Inventory account balance, therefore, must be adjusted to reflect the changes resulting from purchases and sales during a fiscal period/year (need to know how much merchandise a company has on hand at the end of a year) • The amount of ending inventory is the amount that must show on the balance sheet at the end of the year LESSON 14-1

  19. MERCHANDISE INVENTORY (Asset account) page 415 LESSON 14-1

  20. 3 3 ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT page 416 2 1 Merchandise Inventory does not have an expense account—use Income Summary 1. Write the debit amount. 2. Write the credit amount. 3. Label the two parts of this adjustment with a small letter din parentheses. LESSON 14-1

  21. Merchandise Inventory Jan. 1 Bal. 294,700.00 Adj. (d) 4,200.00 (New Bal. 298,900.00) Income Summary Adj. (d) 4,200.00 ANALYZING AN ADJUSTMENT WHEN ENDING MERCHANDISE INVENTORY IS GREATER THAN BEGINNING MERCHANDISE INVENTORY page 417 • If the amount of merchandise inventory on hand is greater than the January 1 balance of Merchandise Inventory, opposite entries would be made—debit Merchandise Inventory and credit Income Summary LESSON 14-1

  22. LESSON 14-4 Planning and Recording an Allowance for Uncollectible Accounts Adjustment

  23. Allowance Method of Recording Losses From Uncollectible Accounts • With each sale on account, a business takes a risk that customers will not pay their accounts • Accounts Receivable that cannot be collected are called uncollectible accounts • The risk is the cost of doing business that should be recorded as an expense in the same accounting period that the revenue is earned • Accurate financial reporting requires that expenses be recorded in the fiscal period in which the expenses contribute to earning revenue (CONCEPT: Matching Expenses with Revenue) LESSON 14-1

  24. Allowance Method of Recording Losses From Uncollectible Accounts • At the end of a fiscal year, a business does not know which customer accounts will become uncollectible • To solve this accounting problem, a business can calculate and record an estimated amount of uncollectible accounts expense • Estimating uncollectible accounts expense at the end of a fiscal period accomplishes two (2) objectives: • It reports a balance sheet amount for Accounts Receivable that reflects the amount the business expects to collect in the future • It recognizes the expense of uncollectible accounts in the same period in which the related revenue is recorded LESSON 14-1

  25. ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS • Creating the estimated value of uncollectible accounts to a contra account is called the Allowance Method of Recording Losses from Uncollectible accounts • The difference between an asset’s account balance and its related contra account balance is called Book Value • The difference between the balance of Accounts Receivable and its contra account, Allowance for Uncollectable Accounts, is called Book Value of Accounts Receivable LESSON 14-1

  26. ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS page 419 LESSON 14-1

  27. Total Saleson Account × Percentage = EstimatedUncollectibleAccounts Expense ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE page 420 • Many businesses use a percentage of total sales on account to estimate uncollectible accounts expense • Each sale on account represents a risk of loss from an uncollectible account • If the estimated percentage of loss is accurate, the amount of uncollectible accounts expense will be accurate regardless of when the actual losses occur = × 1% (.01) $124,500.00 $1,245.00 LESSON 14-1

  28. ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE • The percentage of total sales on account method of estimating uncollectible accounts expense assumes that a portion of every sale on account dollar will become uncollectible • The Allowance for Uncollectible Accounts balance in the Trial Balance column is the allowance estimate from the previous fiscal period that has not yet been indentified as uncollectible • When the allowance account has a previous credit balance, the amount of the adjustment is added to the previous balance LESSON 14-1

  29. 3. Label the two parts with a small letter e in parentheses. 3 3 ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE page 421 1 2 1. Enter the estimated uncollectible amount. 2. Enter the same amount in the Adjustments Debit column. LESSON 14-1

  30. LESSON 14-5 Planning and Recording Depreciation Adjustments

  31. Categories of Assets • Most businesses use two (2) broad categories of assets in their operations • (1) Cash and other assets expected to be exchanged for cash or consumed within a year are called current assets • (2) Assets that will be used for a number of years in the operation of a business are called plant assets (computers, cash registers, sales display cases, furniture) • Businesses may have three (3) major types of plant assets—equipment, buildings, and land • Hobby Shack records its equipment in two (2) different equipment accounts: Office Equipment and Store Equipment • Hobby Shack rents the building and the land where the business is located so it does not need plant asset accounts for buildings and land LESSON 14-1

  32. Depreciating Plant Assets • A business buys plant assets to use in earning revenue • For example: • Hobby Shack bought a new lighted display case • Hobby Shack knows that the display case will be useful only for a limited period of time • After several years, most display cases become worn from use and no longer attractively display the products • Hobby Shack will replace worn display cases with newer models • Each display case has a limited useful life to the business • In order to match revenue with the expenses used to earn the revenue, the cost of a plant asset should be expensed over the plan asset’s useful life LESSON 14-1

  33. Depreciating Plant Assets • A portion of a plant asset’s cost is transferred to an expense account in each fiscal period that a plant asset is used to earn revenue (CONCEPT: Matching Expenses with Revenue) • The portion of a plant asset’s cost that is transferred to an expense account in each fiscal period during a plan asset’s useful like is called Depreciation Expense • Three (3) factors are considered in calculation the annual amount of depreciation expense for a plant asset: • (1) Original Cost: the original cost of a plant asset includes all costs paid to make the asset usable to a business (price of the asset, delivery costs, and necessary installation costs) LESSON 14-1

  34. Depreciating Plant Assets • (2) Estimated Salvage Value: the amount an owner expects to receive when a plant asset is removed from use (also called scrap value) • Generally a business removes a plant asset form use and disposes of it when the asset is no longer usable • The amount that will be received for an asset at the time of its disposal is not known when the asset is bought • The amount that may be received at disposal must be estimated LESSON 14-1

  35. Depreciating Plant Assets • (3) Estimated Useful Life: the total amount of depreciation expense is distributed over the estimate useful life of a plant asset • When a plant asset is bought, the exact length of useful life is not known • The number of years of useful life must be estimated—2 factors affect the useful life of a plant asset: • (1) physical depreciation—caused by wear from use and deterioration from aging and weathering • (2) functional depreciation—occurs when a plant asset becomes inadequate or obsolete • An asset is obsolete when a newer asset can operate more efficiently or produce better service LESSON 14-1

  36. TERMS REVIEW page 426 • book value of a plant asset—the original cost of a plant asset minus accumulated depreciation LESSON 14-1

  37. OriginalCost Estimated TotalDepreciationExpense – ÷ EstimatedSalvage Value Years ofEstimatedUseful Life = = AnnualDepreciationExpense Estimated TotalDepreciationExpense CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424 (straight-line method) 1. Subtract the asset’s estimated salvage value from original cost. 2. Divide the estimated total depreciation expense by the years of estimated useful life. (equal amount of depreciation expense in each year) 1 $1,250.00 – $250.00 = $1,000.00 2 $1,000.00 ÷ 5 = $200.00 LESSON 14-1

  38. 2012AccumulatedDepreciation Original Cost + 2013DepreciationExpense AccumulatedDepreciation = EndingBook Value 2013AccumulatedDepreciation – = CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE (Accumulated Depreciation & Book Value) • Accumulated Depreciation--The total amount of depreciation expense that has been recoded since the purchase of a plant asset $400.00 + $200.00 = $600.00 • Book Value-The original cost of a plant asset minus accumulated depreciation – $1,250.00 $600.00 = $650.00 LESSON 14-1

  39. 3 3 ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE page 425 2 1 1. Write the debit amounts. 2. Write the credit amounts. 3. Label the adjustments. LESSON 14-1

  40. LESSON 14-6 Calculating Federal Income Tax and Completing a Work Sheet

  41. Federal Income Tax Expense Adjustment • Corporations anticipating annual federal income taxes of $500,000 or more are required to pay their estimated taxes each quarter • Estimated income tax is paid in quarterly installments in April, June, September, and December • However, the actual federal income tax owed is calculated at the end of the fiscal year • Based on the actual income tax owned for a year, a corporation must file an annual return • Any additional tax owed that was not paid in quarterly installments must be paid when the final return is filed LESSON 14-1

  42. Federal Income Tax Expense Adjustment • Each tax payment is recorded as a DEBIT to Federal Income Tax Expense and a CREDIT to Cash • Federal income tax is an expense of a corporation • The amount of tax depends on net income before the tax is recorded • Federal Income Tax Expenseis an expense account • Federal Income Tax Payableis a liability account LESSON 14-1

  43. Federal Income Tax Expense Adjustment • In order to make adjustments to federal income tax, you must first determine the net income before federal income tax expense • Follow these steps: (pg. 327) • Complete all other adjustments on a work sheet • Extend all amounts except Federal Income Tax Expense to the Income Statement or Balance Sheet columns • On a separate sheet of paper, total the work sheet’s Income Statement columns • Calculate the difference between the Income Statement Debit column total and the Income Statement Credit column total • The difference between the totals of these two income statement columns is the net income before federal income tax expense LESSON 14-1

  44. Total of Income Statement Credit column $ 500,253.10 Less total of Income Statement Debit column before federal income tax –396,049.91 Equals Net Income before Federal Income Tax $ 104,203.19 FEDERAL INCOME TAX EXPENSE ADJUSTMENT page 427 LESSON 14-1

  45. CALCULATING FEDERAL INCOME TAX • The amount of federal income tax expense a corporation must pay is calculated using a tax rate table furnished by the Internal Revenue Service (see pg. 428) • Different tax percentages (tax brackets) are applied to different portions of the net income to determine the total federal income tax owed LESSON 14-1

  46. CALCULATING FEDERAL INCOME TAX page 428 LESSON 14-1

  47. Hobby Shack Example: • Net Income before federal income tax: $104,203.19 • 1st Net Income amount -$50,000 x .15 = $7,500.00 • 2nd Net Income amount-$25,000 x .25 = 6,250.00 • 3rdNet Income amount-$25,000 x .34 = 8,500.00 • 4th Net Income amount-$ 4,203.19 x .39 = 1,639.24 • Total Federal Tax Amount = $23,889.24 50,000 104,203.19 25,000 100,000.00 25,000 4,203.19 100,000 LESSON 14-1

  48. RECORDING THE FEDERAL INCOME TAX ADJUSTMENT (pg. 429) • Calculate the amount of the federal income tax adjustment • The adjustment is the difference between the federal income tax for the year and the taxes paid during the year LESSON 14-1

  49. 3 1 1 3 RECORDING THE FEDERAL INCOME TAX ADJUSTMENT page 429 2 1. Calculate the amount of federal income tax expense adjustment. 2. Total and rule the Adjustments columns. 3. Extend account balances. LESSON 14-1

  50. 1 1 2 4 5 3 COMPLETING A WORK SHEET page 430 1. Total the Income Statement and Balance Sheet columns. 2. Calculate and enter the net income after federal income tax. 3. Extend the net income amount. 4. Calculate the column totals. 5. Rule double lines. LESSON 14-1

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