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CHAPTER TWENTY-THREE

CHAPTER TWENTY-THREE. CORPORATIONS: EARNINGS AND DISTRIBUTIONS. RETAINED EARNINGS. RETAINED EARNINGS. Very few transactions affect the Retained Earnings account. RETAINED EARNINGS. RETAINED EARNINGS. NET INCOME. Usually the only credit is the Net Income. RETAINED EARNINGS.

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CHAPTER TWENTY-THREE

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  1. CHAPTER TWENTY-THREE CORPORATIONS: EARNINGS AND DISTRIBUTIONS

  2. RETAINED EARNINGS RETAINED EARNINGS Very few transactions affect the Retained Earnings account.

  3. RETAINED EARNINGS RETAINED EARNINGS NET INCOME Usually the only credit is the Net Income.

  4. RETAINED EARNINGS RETAINED EARNINGS NET LOSS NET INCOME DIVIDENDS APPROPRIATIONS Only three types of debits

  5. CLOSING ENTRIES • Close revenue accounts to Income Summary • Same entry as sole proprietorships and partnerships • Close expense accounts to Income Summary • Same entry as sole proprietorships and partnerships • Close Income Summary to RETAINED EARNINGS • Credit balance in Income Summary = Net Income • Debit balance in Income Summary = Net Loss • Close DIVIDENDS to RETAINED EARNINGS

  6. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Income Summary 337,000 2 Retained Earnings 337,000 3 4 5 Closing Entry #3 EXAMPLE: If the corporation has net income of $337,000 for the period 6 7 8 9 10 11

  7. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Retained Earnings 52,000 2 Income Summary 52,000 3 4 5 What if the corporation has a NET LOSS of $52,000? 6 7 8 9 10 11

  8. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Retained Earnings 30,000 2 Dividends 30,000 3 4 5 Closing Entry #4 EXAMPLE If the corporation declares $30,000 in dividends…. 6 7 8 9 10 11

  9. CORPORATION INCOME TAXES • A disadvantage of corporations is that they must pay income taxes. • Corporations estimate their annual income and make quarterly payments. • At end of accounting period, actual amount of income tax is determined. • if it differs from estimates….ADJUSTING ENTRY is made

  10. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 2 3 4 EXAMPLE: If the corporation estimates its income taxes for 20-1 will be $160,000 5 6 7 8 9 10 11

  11. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Income Tax Expense 40,000 2 Cash 40,000 3 4 Quarterly payments will be made on April 15, June 15, September 15 and December 15. $160,000 ÷ 4 = $40,000 5 6 7 8 9 10 11

  12. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Income Tax Expense 40,000 2 Cash 40,000 3 4 Same entry made each quarter 5 6 7 8 9 10 11

  13. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Income Tax Expense 40,000 2 Cash 40,000 3 4 Income Tax Expense 3,000 5 Income Tax Payable 3,000 6 At the end of the year, actual income taxes are calculated as $163,000…. $3,000 more than estimated ADJUSTING ENTRY needed. 7 8 9 10 11

  14. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Income Tax Expense 40,000 2 Cash 40,000 3 4 Income Tax Expense 3,000 5 Income Tax Payable 3,000 6 7 Income Tax Payable 3,000 8 Cash 3,000 9 Additional $3,000 is paid when tax return is filed. 10 11

  15. CASH DIVIDEND • A distribution of corporate assets (cash) to stockholders. • To be issued if corporation has: • Unrestricted retained earnings • 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 and Date of payment

  16. CASH 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 of 10,000 shares of common stock. Both dividends are payable on February 20 to stockholders of record on February 10. DATE OF DECLARATION: Common Stock Preferred Stock 4,000 shares 10,000 shares x $4 x $2 $20,000 $16,000

  17. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Feb. 1 Cash Dividends 16,000 2 Preferred Dividends Payable 16,000 3 4 1 Cash Dividends 20,000 5 Common Dividends Payable 20,000 6 7 Separate entries are made for each type of stock. 8 9 10 11

  18. CASH 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 of 10,000 shares of common stock. Both dividends are payable on February 20 to stockholders of record on February 10. DATE OF RECORD: No journal entry!!! 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.

  19. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Feb. 20 Preferred Dividends Payable 16,000 2 Cash 16,000 3 4 Common Dividends Payable 20 20,000 5 Cash 20,000 6 7 Date of Payment 8 9 10 11

  20. STOCK DIVIDEND • A proportionate distribution of shares of a corporation’s own stock to its stockholders • Several reasons for this type of dividend: • Company may be short of cash • Company may want to increase the marketability of its shares by lowering the price per share. • Corporation may want to transfer a portion of retained earnings to a paid-in capital to indicate that it is unavailable for dividends

  21. STOCK DIVIDEND • Typically stated as a percentage of common stock outstanding • Date of Declaration journal entry varies depending on the dividend percentage • Dividends for less than 20 - 25% (Small) • Stock Dividend account is debited for the Market Value of the stock • Dividends more than 20 - 25% (Large) • Stock Dividend account is debited for the Par or Stated Value of the stock

  22. SMALL 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 x 10% 400 Shares to be distributed

  23. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Mar. 5 Stock Dividends 4,800 2 Small stock dividends…. Stock Dividend account is debited for the Market Value of the shares to be distributed. 400 shares x $12 market value 3 4 5 6 7 8 9 10 11

  24. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Mar. 5 Stock Dividends 4,800 2 Stock Div. Distributable 2,000 3 4 Stock Dividend Distributable account is credited for the par value. 400 shares x $5 par value 5 6 7 8 9 10 11

  25. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Mar. 5 Stock Dividends 4,800 2 Stock Div. Distributable 2,000 3 Paid-In-Capital in Excess 4 of Par - Common Stock 2,800 5 6 Difference between Market Value and Par Value 7 8 9 10 11

  26. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Mar. 5 Stock Dividends 4,800 2 Stock Div. Distributable 2,000 3 Paid-In-Capital in Excess 4 of Par - Common Stock 2,800 5 6 27 7 8 Date of Distribution 9 10 11

  27. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Mar. 5 Stock Dividends 4,800 2 Stock Div. Distributable 2,000 3 Paid-In-Capital in Excess 4 of Par - Common Stock 2,800 5 6 27 Stock Div. Distributable 2,000 7 Common Stock 2,000 8 Reported as an addition to Common Stock on the Balance Sheet 9 10 11

  28. LARGE STOCK DIVIDEND • Recorded similarly to the small stock dividend, except: • Stock Dividend account is debited for the PAR VALUE instead of the market value. • Stock Dividend Distributable is 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.

  29. STOCK SPLITS • Exchange 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

  30. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT At Declaration 1 Retained Earnings xxx 2 Dividends Payable xxx 3 4 Cash Dividend Distribution of cash to stockholders 5 6 7 8 9 10 11

  31. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Retained Earnings xxx 2 Dividends Payable xxx 3 At Payment 4 Dividends Payable xxx 5 Cash xxx 6 7 8 9 10 11

  32. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Retained Earnings xxx 2 Dividends Payable xxx 3 4 Dividends Payable xxx 5 Cash xxx 6 How do Cash Dividends effect the ASSETS? 7 8 9 10 11

  33. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Retained Earnings xxx 2 Dividends Payable xxx 3 4 Dividends Payable xxx 5 Cash xxx 6 Decreased 7 8 9 10 11

  34. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Retained Earnings xxx 2 Dividends Payable xxx 3 4 Dividends Payable xxx 5 Cash xxx 6 How do they effect PAID-IN CAPITAL? 7 8 9 10 11

  35. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Retained Earnings xxx 2 Dividends Payable xxx 3 4 Dividends Payable xxx 5 Cash xxx 6 No Effect 7 8 9 10 11

  36. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Retained Earnings xxx 2 Dividends Payable xxx 3 4 Dividends Payable xxx 5 Cash xxx 6 How do they effect RETAINED EARNINGS? 7 8 9 10 11

  37. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Retained Earnings xxx 2 Dividends Payable xxx 3 4 Dividends Payable xxx 5 Cash xxx 6 Decrease 7 8 9 10 11

  38. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT At Declaration 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 Paid-In Capital in Excess 4 of Par - Common Stock xxx 5 Stock Dividend (small) Distribution of corporation’s stock to stockholders 6 7 8 9 10 11

  39. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 Paid-In Capital in Excess 4 of Par - Common Stock xxx 5 At Distribution 6 Stock Div. Distributable xxx 7 Common Stock xxx 8 How do small Stock Dividends effect the ASSETS? 9 10 11

  40. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 Paid-In Capital in Excess 4 of Par - Common Stock xxx 5 6 Stock Div. Distributable xxx 7 Common Stock xxx 8 No Effect 9 10 11

  41. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 Paid-In Capital in Excess 4 of Par - Common Stock xxx 5 6 Stock Div. Distributable xxx 7 Common Stock xxx 8 How do they effect PAID-IN CAPITAL? 9 10 11

  42. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 Paid-In Capital in Excess 4 of Par - Common Stock xxx 5 6 Stock Div. Distributable xxx 7 Common Stock xxx Increase by market value 8 9 10 11

  43. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 Paid-In Capital in Excess 4 of Par - Common Stock xxx 5 6 Stock Div. Distributable xxx 7 Common Stock xxx 8 How do they effect RETAINED EARNINGS? 9 10 11

  44. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 Paid-In Capital in Excess 4 of Par - Common Stock xxx 5 6 Stock Div. Distributable xxx 7 Common Stock xxx Decrease by market value 8 9 10 11

  45. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT At Declaration 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 4 Stock Dividend (large) Distribution of corporation’s stock to stockholders 5 6 7 8 9 10 11

  46. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 At Distribution 4 Stock Div. Distributable xxx 5 Common Stock xxx 6 7 How do large Stock Dividends effect the ASSETS? 8 9 10 11

  47. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 4 Stock Div. Distributable xxx 5 Common Stock xxx No Effect 6 7 8 9 10 11

  48. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 4 Stock Div. Distributable xxx 5 Common Stock xxx 6 How do they effect PAID-IN CAPITAL? 7 8 9 10 11

  49. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 4 Stock Div. Distributable xxx 5 Common Stock xxx Increase by par value 6 7 8 9 10 11

  50. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx 2 Stock Div. Distributable xxx 3 4 Stock Div. Distributable xxx 5 Common Stock xxx 6 How do they effect RETAINED EARNINGS? 7 8 9 10 11

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