Chapter 21

1. Chapter 21 Corporate Earnings, Taxes, and Distributions

2. LO1 The entry to record the first quarterly payment on April 15 is: Learning Objective 1Compute and record corporate income tax. Corporations pay taxes based on their taxable income. Surf Outlet expects taxable income of $210,000 for 2010.Its estimated tax liability is computed as follows: Surf Outlet’s quarterly tax payments are $16,287.50 ($65,150/4 quarters). We record the entry for the first quarterly income tax payment on April 15 by debiting Income Tax Expense for $16,287.50 and crediting Cash for the same amount.

3. LO1 The entry to record the tax refund receivable on December 31 is: Adjusting Tax Liability to Amount Owed Based on Actual Taxable Income Overpayment of Taxes Underpayment of Taxes The entry to record the additional tax payable on December 31 is

4. LO2 Learning Objective 2 Record transactions involving cash dividends. Dividends On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding.The dividend will be paid on March 19to stockholders of record on February 19. Date of Declaration Record liability for dividend. No entry required on February 19. Date of Record No entry required.

5. LO2 Entries for Cash Dividends On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding.The dividend will be paid on March 19to stockholders of record on February 19. Date of Payment Record payment of cash to stockholders.

6. LO3 100 shares HotAir, Inc. Common Stock $1 par Learning Objective 3Account for stock dividends and stock splits. The corporation distributes additional shares of its own stock to its stockholders without receiving any payment in return. • Why a stock dividend? • Can be used to keep the market • price of the stock affordable. • Can provide evidence of • management’s confidence that • the company is doing well.

7. LO3 Recording a Small Stock Dividend On December 31, 2010, Quest declared a 2% stock dividend, when its stock was selling for$10 per share. The stock will be distributed to stockholders on January 20, 2011. Let’s makethe December 31 entry. On December 31, 2010, Quest declared a 2% stock dividend, when its stock was selling for$10 per share. The stock will be distributed to stockholders on January 20, 2011. Now let’smake the January 20 entry.

8. LO3 Recording a Large Stock Dividend On December 31, 2010, Router declared a 40% stock dividend, when its stock was selling for $8 per share. State law requires that large stock dividends be capitalized at par value per share. A 2-for-1 stock split replaces 100,000 shares of $20 par value stock with 200,000 shares of $10 par value stock. Market value is reduced from $88 per share to about $44 per share. A stock split is the distribution of additional shares to stockholders according to their percent ownership. The split does not affect any balance sheet amounts or any individual stockholder’s percent ownership. Both the Paid-In Capital and Retained Earnings accounts are unchanged by a split, and no journal entry is made.

9. LO4 Learning Objective 4Distribute dividends between common stock and preferred stock.Dividend Preference of Preferred Stock Example: Consider the following Stockholders’ Equity Section of a Balance Sheet See how this dividend is distributed if the preferred stock is cumulative and if it is noncumulative.

10. LO5 Learning Objective 5Record purchases and sales of treasury stock. On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $8,000. Selling Treasury Stock at Cost On June 30, Whitt sold 100 shares of its treasury stock for $4 per share.

11. LO5 Selling Treasury Stock Above Cost On July 19, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per share. Selling Treasury Stock Below Cost

12. LO6 Learning Objective 6Describe events that can affect retained earnings. Retained earnings can have legal or contractual restrictions. In most states, the corporate charters will not allow companies to purchase treasury stock in excess of the balance in retained earnings. Some loan agreements place restrictions on how much dividends can be based on the balance in retained earnings. A corporation’s directors can voluntarily limit dividends because of a special need for cash such as the purchase of new facilities.

13. LO7 Learning Objective 7Prepare a statement of retained earnings. The Statement of Retained Earnings is a summary of the activity that occurred in Retained Earnings during the period

14. LO8 Learning Objective 8Prepare a statement of stockholders’ equity. Many companies issue a Statement of Stockholders’ Equity rather than the Statement of Retained Earnings. The Statement of Stockholders’ Equity is more inclusive and discloses changes in all equity accounts, not just Retained Earnings.

15. LO9 Basicearnings per share Net income - Preferred dividends Weighted-average common shares outstanding = Learning Objective 9 Compute earnings per share and describe its use.

16. LO10 Market price per common share Earnings per share PERatio = Learning Objective 10Compute price-earnings ratio and describe its use. This measure is often used by investors as ageneral guideline in gauging relative stock values.

17. LO11 Dividend Yield Annual cash dividends per share Market value per share = Learning Objective 11 Compute dividend yield and explain its use. This ratio identifies the return, in terms of cashdividends, on the current market price of the stock.

18. End of Chapter 21