Corporate Earnings and Capital Transactions

2. Chapter 21 Corporate Earnings and Capital Transactions Section 1: Accounting for Corporate Earnings Section Objectives • Estimate the federal corporate income tax and prepare related journal entries. • Complete a worksheet for a corporation. • Record corporate adjusting and closing entries. • Prepare an income statement for a corporation. McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

3. Estimate the federal corporate income tax and prepare related journal entries Objective 1 Corporate Income Tax • Recall that a disadvantage of the corporate form of business is that corporations must pay income taxes on profits. • Federal Income Tax Rates: Taxable IncomeTax Rate First $ 50,000 15% Next $ 25,000 25% Next $ 25,000 34% Next $235,000 39% Over$335,000 See IRS publications for rates

4. Tax Estimates • Beginning of year: The corporation estimates the income tax expense for the coming year. • Quarterly: The corporation makes tax deposits based on the estimated tax expense. • April 15 • June 15 • September 15 • December 15 • End of year: The corporation recomputes the estimated income tax expense and compares it to the tax deposits made.

5. 2010 Apr. 15 Income Tax Expense 8,994.00 Cash 8,994.00 Quarterly income tax deposit. Tax Estimates At the beginning of the year, Sports Outfitters Corporationestimated its tax liability for 2010 to be $35,976. Sports Outfitters Corporation makes quarterly deposits during the year. ($35,976 ÷ 4 = $8,994)

6. Additional tax due $ 544 At year-end, Sports Outfitters Corporation recomputes the estimated income tax expense and compares it to the tax deposits made during the year. New estimated tax expense $36,520 Quarterly tax deposits 35,976

7. Year-End Adjustment of Tax Liability • If the quarterly tax deposits are less than the end-of-year estimated tax expense, record the difference as follows: Debit: Income Tax Expense Credit: Income Tax Payable • If the quarterly tax deposits are greater than the end-of-year estimated tax expense, record the difference as follows: Debit: Income Tax Refund Receivable Credit: Income Tax Expense

8. 2010 Dec. 31 Income Tax Expense 544.00 Income Tax Payable 544.00 Estimate of additional tax due. Year-End Adjustment of Tax Liability When books are closed at year-end, the income tax expense is re-computed. The Income Tax Expense account is adjusted.

9. Reporting Income Tax Expense on the Income Statement There are two ways to show income tax expense on the income statement: 1. As a deduction at the bottom of the income statement. 2. As an operating expense, to emphasize that taxes represent a cost of doing business.

10. Deferred Income Taxes Income reported on the financial statements does not usually match taxable income reported on the tax return. Tax laws do not always follow generally accepted accounting principles: • Income or expenses can be included in taxable income this year and appear on the financial statements in later years, or vice versa. • Income or expenses can be included on the financial statements but never appear in taxable income.

11. Complete a worksheet for a corporation QUESTION: How is preparing a worksheet for a corporation different from preparing one for a sole proprietorship? Objective 2 The worksheet for a corporation and a sole proprietorship are almost identical! Yeah. . except, when preparing a worksheet for a corporation, it is necessary to compute and show the income tax adjustment.

12. Corporate WorksheetIncome Tax Adjustment Total the Income Statement Columnsbefore the adjustment for income tax. DebitCredit 1,971,410 2,108,000 Net income before tax 136,590

13. Corporate Worksheet Income Tax Adjustment Compute the income tax expense: First $ 50,000 x 15 % $ 7,500 Next $ 25,000 x 25 % 6,250 Next $ 25,000 x 34 % 8,500 Last $ 36,590 x 39 % (rounded) 14,270 Tax on $136,590 $36,520

14. Corporate WorksheetIncome Tax Adjustment Compute the income tax adjustment: Tax deposit April 15 $ 8,994 Tax deposit June 15 8,994 Tax deposit September 15 8,994 Tax deposit December 15 8,994 Total tax deposits $35,976 Total tax expense 36,520 Tax adjustment –additional tax due $ 544

15. Corporate WorksheetIncome Tax Adjustment Record the income tax adjustment in the Adjustments section of the worksheet: Income Tax Expense: $544.00 debit Income Tax Payable: $544.00 credit

16. Record corporate adjusting and closing entries Objective 3 Adjusting Journal Entries • Using the adjustments column of the worksheet, journalize all of the adjustments in the general journal.

17. Closing Entries 1. Close revenue to Income Summary. 2. Close expenses to Income Summary. 3. Close Income Summary (net income or net loss) to Retained Earnings. The Retained Earnings account accumulates the profits and losses of the business.

18. GENERAL JOURNAL POST DATE DESCRIPTION REF. DEBIT CREDIT 2010 Dec. 31 Income Summary 100,070.00 Retained Earnings 100,070.00 The last closing entry for a corporation transfers the net income after income taxes (or the net loss) from the Income Summary account to Retained Earnings.

19. Prepare an income statement for a corporation Objective 4 Extraordinary, Nonrecurring Items Extraordinary, nonrecurring items are gains or losses from items that: • are highly unusual, • are clearly unrelated to routine operations, and • do not frequently occur. They are shown on the income statement in a separate section titled “Extraordinary Gains and Losses.”

20. Chapter 21 Corporate Earnings and Capital Transactions Section 2: Accounting for Retained Earnings Section Objectives • Record the declaration and payment of cash dividends. • Record the declaration and issuance of stock dividends. • 7. Record stock splits. • 8. Record appropriations of retained earnings. McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

21. Retained Earnings • Does not represent a cash fund. • Are reinvested in: • Inventory • Plant and Equipment • Various other types of assets • May be distributed to stockholders. • Appear in the Stockholders’ Equity section of the balance sheet.

22. Record the declaration and payment of cash dividends Objective 5 The date on which the board of directors declares a dividend. Dates Relevant to Dividends Declaration Date Record Date On this date, it is determined which specific stockholders are to receive a dividend. Payment Date The date on which dividends are paid.

23. To Record Cash Dividends • Declaration Date: • Debit: Retained Earnings • Credit: Dividends Payable (Common or Preferred) • Record Date: A list is made of the stockholders and the number of shares owned by each. • Payment Date: Debit: Dividends Payable (Common or Preferred) Credit: Cash

24. Record the declaration and issuance of stock dividends Objective 6 Stock Dividend • A stock dividend is a distribution of corporation’s own stock. • Made on a pro-rata basis. • Results in a conversion of a portion of retained earnings to permanent capital. • Involves the Common Stock Dividends Distributable account.

25. Common Stock Dividend Distributable Account • The common stock dividend distributable account is an equity account. • Used to record par or stated value of shares to be issued as a result of a stock dividend declaration. The excess of market value over par value is credited to Paid-in Capital in Excess of Par.

26. To Record Stock Dividends • Declaration Debit: Retained Earnings Credit: Common Stock Dividend Distributable Credit: Paid-in Capital in Excess of Par—Common • Distribution Debit: Common Stock Dividend Distributable Credit: Common Stock

27. Book Value • Represents the total equity applicable to the class of stock divided by the number of shares outstanding. • Remains the same before and after a stock dividend, but each shareholder owns more shares of stock with proportionately lower book value per share. For each class of stock, book value per share = equity ÷ shares outstanding

28. Objective 7 Record stock splits Stock Split • Occurs when a corporation issues two or more shares of new stock to replace each share outstanding without making changes to the capital accounts. • Declared when stock is difficult to sell because of high market price. • Does not change the capital account balances. • Requires only a memorandum notation in the general journal.

29. 2010 Dec. 1On this date the board of directors declared a 3-for-1 stock split and reduced the stated value of common stock from $75 to $25 per share. Total outstanding shares will be 120,000. Stock Split Only a memorandum entry is needed in the general journal.

30. QUESTION: What is an appropriation of retained earnings? ANSWER: An appropriation of retained earnings is a formal declaration of an intention to restrict dividends. Record appropriations of retained earnings Objective 8 Corporations restrict dividend payments in order to reinvest in plant assets or working capital.

31. 2010 Oct. 5 Retained Earnings 60,000.00 Retained Earnings Appropriated for Retail Center Construction 60,000.00 Appropriation for construction made by board of directors on October 5. Anappropriation of retained earningsreduces the amount of retained earnings available for dividend declarations. It does not mean that cash has been set aside in a fund. Notice that no entry is made to the Cash account.

32. Chapter 21 Corporate Earnings and Capital Transactions Section 3: Other Capital Transactions and Financial Statements Section Objectives • 9. Record a corporation’s receipt of donated assets. • Record treasury stock transactions. • 11. Prepare financial statements for a corporation. McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

33. Objective 9 Record a corporation’s receipt of donated assets QUESTION: What is donated capital? ANSWER: Donated capital is capital resulting from the receipt of gifts by a corporation. Donated capital is recorded at its fair market value.

34. 2010 Jan. 2 Land 100,000.00 Donated Capital 100,000.00 Appraised value of plant site donated by city. A community that wishes to attract new industry may give a corporation a plant site or building as an inducement for the corporation to move to the community.

35. Objective 10 Record treasury stock transactions Treasury Stock Why do corporations purchase their own stock? • The corporation has extra cash. • The corporation offers treasury stock as incentive plans for officers. • The corporation wants to create a demand for the stock, thus increasing its market value. • The corporation can purchase shares of stockholders who need cash or want to retire (privately held corporations).

36. 2010 Jan. 10 Treasury Stock - Preferred 21,200.00 Cash 21,200.00 Purchased 400 shares of treasury stock. Record the Purchase of Treasury Stock

37. Objective 11 Prepare financial statements for a corporation Financial Statements for a Corporation Four financial statements are prepared for a corporation: • Income statement • Statement of retained earnings • Balance sheet • Statement of cash flows

38. QUESTION: What is a statement of retained earnings? ANSWER: A statement of retained earnings is a financial statement that shows all changes that have occurred in retained earnings during the period.

39. The Corporate Balance Sheet The Balance Sheet’s asset and liability sections are very similar to a sole proprietorship’s. Assets Liabilities

40. Thank You for using College Accounting, 12th Edition Price • Haddock • Farina