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Corporate Earnings and Capital Transactions

Corporate Earnings and Capital Transactions

Section 1: Accounting

for Corporate Earnings

Chapter

21

Section Objectives

1. Estimate the federal corporate income tax and prepare related journal entries.

2. Complete a worksheet for a corporation.3. Record corporate adjusting and closing entries.4. Prepare an income statement for a corporation.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

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Federal Income Tax Rates:

Taxable Income Tax 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

Recall that a disadvantage of the corporate form of business is that corporations must pay income taxes on profits.

Corporate Income Tax

Estimate the federal corporate income tax and prepare related journal entries

Objective 1

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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.

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2. Sports Outfitters Corporation makes quarterly deposits during the year.

($35,976 ÷ 4 = $8,994)

2010

Apr. 15 Income Tax Expense 8,994.00 Cash 8,994.00 Quarterly income tax deposit.

1. At the beginning of the year, Sports Outfitters Corporation estimated its tax liability for 2010 to be $35,976.

Tax Estimates

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3. 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

Additional tax due $ 544

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If the quarterly tax deposits are less than the end-of-year estimated tax expense, record the difference as follows:

Year-End Adjustment of Tax Liability

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

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When books are closed at year-end, the income tax expense is re-computed.

Year-End Adjustment of Tax Liability

The Income Tax Expense account is adjusted.

2010 Dec. 31 Income Tax Expense 544.00

Income Tax Payable 544.00 Estimate of additional tax due.

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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.

There are two ways to show income tax expense on the income statement:

Reporting Income Tax Expense on the Income Statement

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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:

Deferred Income Taxes

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.

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How is preparing a worksheet for a corporation different from preparing one for a sole proprietorship?

QUESTION:

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.

Complete a worksheet for a corporation

Objective 2

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Debit Credit

1,971,410 2,108,000

Corporate WorksheetIncome Tax Adjustment

Total the Income Statement Columns before the adjustment for income tax.

Net income before tax 136,590

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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

Compute the income tax expense:

Corporate Worksheet Income Tax Adjustment

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Compute the income tax adjustment:

Corporate WorksheetIncome 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

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Record the income tax adjustment in the Adjustments section of the worksheet:

Corporate WorksheetIncome Tax Adjustment

Income Tax Expense: $544.00 debit

Income Tax Payable: $544.00 credit

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Adjusting Journal Entries

Using the adjustments column of the worksheet, journalize all of the adjustments in the general journal.

Record corporate adjusting and closing entries

Objective 3

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1. Close revenue to Income Summary.

2. Close expenses to Income Summary.

3. Close Income Summary (net income or net loss) to Retained Earnings.

Closing Entries

The Retained Earnings account accumulates the profits and losses of the business.

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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.

GENERAL JOURNAL

POSTDATE DESCRIPTION REF. DEBIT CREDIT

2010

Dec. 31 Income Summary 100,070.00

Retained Earnings 100,070.00

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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.”

Prepare an income statement for a corporation

Objective 4

Corporate Earnings and Capital Transactions

Corporate Earnings and Capital Transactions

Section 2: Accounting

for Retained Earnings

Chapter

21

Section Objectives

5. Record the declaration and payment of cash dividends.

6. Record the declaration and issuance of stock dividends.

7. Record stock splits.8. Record appropriations of retained earnings.

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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.

Retained Earnings

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The date on which the board of directors declares a dividend.

DeclarationDate

On this date, it is determined which specific stockholders are to receive a dividend.

The date on which dividends are paid.

Dates Relevant to Dividends

RecordDate

PaymentDate

Record the declaration and payment of cash dividends

Objective 5

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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

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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.

Record the declaration and issuance of stock dividends

Objective 6

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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.

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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

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Book Value

For each class of stock,

book value per share = equity ÷ shares outstanding

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.

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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.

Record stock splitsObjective 7

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2010

Dec. 1 On this date the board ofdirectors declared a 3-for-1stock split and reduced thestated value of common stockfrom $75 to $25 per share.Total outstanding shares willbe 120,000.

Only a memorandum entry is needed in the general journal.

Stock Split

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An appropriation of retained earnings is a formal declaration of an intention to restrict dividends.

ANSWER:

QUESTION:

What is an appropriation of retained earnings?

Corporations restrict dividend payments in order to reinvest in plant assets or working capital.

Record appropriations of retained earnings

Objective 8

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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.

An appropriation of retained earnings reduces 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.

Corporate Earnings and Capital Transactions

Corporate Earnings and Capital Transactions

Section 3: Other CapitalTransactions and Financial Statements

Chapter

21

Section Objectives

9. Record a corporation’s receipt of donated assets.

10. Record treasury stock transactions.

11. Prepare financial statements for a corporation.

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Donated capital is capital resulting from the receipt of gifts by a corporation.

ANSWER:

QUESTION:

What is donated capital?

Donated capital is recorded at its fair market value.

Record a corporation’s receipt of donated assets

Objective 9

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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.

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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).

Why do corporations purchase their own stock?

Treasury Stock

Record treasury stock transactions

Objective 10

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Record the Purchase of Treasury Stock

2010

Jan. 10 Treasury Stock - Preferred 21,200.00 Cash 21,200.00 Purchased 400 shares of treasury stock.

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Financial Statements for a Corporation

Income statement

Statement of retained earnings

Balance sheet

Statement of cash flows

Four financial statements are prepared for a corporation:

Prepare financial statements for a corporation

Objective 11

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A statement of retained earnings is a financial statement that shows all changes that have occurred in retained earnings during the period.

ANSWER:

QUESTION:

What is a statement of retained earnings?

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The Corporate Balance Sheet The Corporate Balance Sheet

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

Assets

Liabilities

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Thank Youfor using

College Accounting, 12th Edition

Price • Haddock • Farina