lesson 14-1 distributing corporate earnings to stockholders

LESSON 14-1

Distributing Corporate Earnings to Stockholders

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New VocabularyRetained earnings: An amount earned by a corporation and not yet distributed to stockholdersDividends: Earnings distributed to stockholdersBoard of directors: A group of people elected by the stockholders to manage a corporationDeclaring a dividend: Action by a Board of Directors to distribute corporate earnings to stockholders

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STOCKHOLDERS’ EQUITY ACCOUNTS USED BY A CORPORATION

page 405

(3000) STOCKHOLDERS’ EQUITY3110 Capital Stock3120 Retained Earnings3130 Dividends3140 Income Summary

Investment of all ownersEarnings not yet

distributed

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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. Date of payment is January 15. Memorandum No. 79.

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PAYING A DIVIDEND page 407

January 15. Paid cash for quarterly dividend declared December 15, $5,000.00. Check No. 379.

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Audit Your Understanding

Under what major chart of accounts division are the owners’ equity accounts for a corporation normally listed?Stockholders’ equity (300)

How many accounts are kept for the investment of all owners of the Corporation? One account called Capital Stock

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Audit Your Understanding

What account does a corporation use to record earnings not yet distributed to stockholders? Retained Earnings

What action is required before a corporation can distribute income to its stockholders?The Board of Directors declares a dividend

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14-2 RECORDING A TRIAL BALANCE ON A WORK SHEET

page 410

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221. Account title

2. Account balance3. Total, prove, and rule the debit and credit columns

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RECORDING SUPPLIES ADJUSTMENTS ON A WORK SHEET

page 412

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ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT

page 413

1. Enter the amount of insurance used in the Adjustments Credit column.

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Audit Your Understanding

What accounts are used for the adjustment to office supplies?Supplies—office and Supplies Expense—Office

What accounts are used for the adjustment to prepaid insurance?Prepaid Insurance and Insurance Expense

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14-3 New Vocabulary

Merchandise inventory: The amount of goods on hand for sale to customers

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MERCHANDISE INVENTORYpage 415

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ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT

page 416

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Audit Your Understanding

What accounts are used for the adjustment for merchandise inventory?Merchandise Inventory and Income Summary

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Audit Your Understanding

What adjusting entry is entered on a worksheet when the ending merchandise inventory is less than the beginning value?Debit Income Summary and credit Merchandise Inventory

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LESSON 14-4

Planning and Recording an Allowance for Uncollectible Accounts Adjustment

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New VocabularyUncollectible Accounts: Accounts Receivable that cannot be collectedAllowance method of recording losses from uncollectible accounts: Crediting the estimated value of uncollectible accounts to a contra accountBook value: The difference between an asset’s account balance and its related contra account balanceBook value of Accounts Receivable: The difference between the balance of Accounts Receivable and its contra account, Allowance for Uncollectible Accounts

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ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS

page 419

This is a contra account for accounts receivable.

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EstimatedUncollectible

Accounts Expense

=Percentage×

Total Saleson Account

$1,245.00=1%×$124,500.0

0

ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE

page 420

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ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE

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page 421

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Audit Your Understanding

Why is an uncollectible accounts recorded as an expense rather than as a reduction in revenue?Loss is considered a regular expense of doing business. Revenue was earned when the sale was made. Failing to collect an account does not cancel the sale.

When do businesses normally estimate the amount of their uncollectible accounts expense?At the end of the fiscal period

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Audit Your UnderstandingWhat two objectives will be accomplished

by recording an estimated amount of uncollectible accounts expense?(1) Report a balance sheet amount for Accounts Receivable that reflects the amount the business expects to collect in the future. (2) Recognize the expense of uncollectible accounts in the same period in which the related revenue is recorded.

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Audit Your Understanding

Why is Allowance for Uncollectible Accounts called a contra account?It reduces its related asset account, Accounts Receivable

How is the book value of Accounts Receivable calculated?The difference between the balance of Accounts Receivable and its contra account, Allowance for Uncollectible Accounts

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LESSON 14-5

Planning and Recording Depreciation Adjustments

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New Vocabulary

Current assets: Cash and other assets expected to be exchanged for cash or consumed within a year

Plant assets: Assets that will be used for a number of years in the operation of the business

Depreciation expense: the portion of a plant asset’s cost that is transferred to an expense account in each fiscal period during a plant asset’s useful life

Estimated salvage value: the amount an owner expects to receive when a plant asset is removed from use

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New Vocabulary

Straight-line method of depreciation: Charging an equal amount of depreciation expense for a plant asset in each year of useful life

Accumulated depreciation: The full amount of depreciation expense that has been recorded since the purchase of a plant asset

Book value of a plant asset: the original cost of a plant assets minus accumulated depreciation

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CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE

page 424

Estimated Total

Depreciation

Expense

=

Estimated

Salvage Value

–Original

Cost

$1,000.00=$250.00–$1,250.00

AnnualDepreciation

Expense=

Years ofEstimatedUseful Life

÷

Estimated Total

DepreciationExpense

$200.00=

5÷$1,000.00

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.

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(continued on next slide)

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CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE

page 424

20X3AccumulatedDepreciation

=

20X3Depreciati

onExpense

+20X2

AccumulatedDepreciation

$600.00=$200.00+$400.00

EndingBook Value

=Accumulate

dDepreciation

–Original

Cost

$650.00=$600.00–$1,250.00

(continued from previous slide)

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ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE

page 425

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Audit Your Understanding

What are the two categories of assets?Current assets and plant assets

What three factors are used to calculate a plant asset’s annual depreciation expense?Original cost, estimated salvage value, and estimated useful life

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14-6 Calculating Federal Income Tax and Completing a Worksheet

Federal income tax expense adjustmentTotal of income statement credit columnLess total of income statement debit column before federal income taxEquals net income before Federal Income Tax

500,253.10

-396,049,91

104,203.19

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Calculating Federal Income TaxPage 428 (Example: 104,203.19)15% of net income before taxes, $0 to

$50,000 (.15 x first 50,000)Plus 25% of net income before taxes, $50,000 to $75,000 (.25 x next 25,000)Plus 34% of net income before taxes, $75,000 to $100,000 (.34 of next 25,000)Plus 39% of income before taxes, $100,000 to $335,000 (.39 x up to next 235,000)Plus 34% of net income before taxes over $335,000 (.34 x the rest of the income)

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Record the Federal Income Tax AdjustmentCalculate the amount of federal income tax expense adjustment.

Once you know the yearly fed tax, enter it in the Income Statement Debit Column. **So Important: The adjustment is the difference between the federal income tax for the year and the taxes already paid during the year.

Enter the same amount in the adjustments debit column of the federal income tax expense line on the worksheetEnter the federal income tax expense adjustment in the adjustments column on the federal income tax payable line of the worksheetThen extend the balance to the Balance Sheet Credit column

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Finishing the Adjustments Column

Total and rule the Adjustments column

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Completing a Worksheet

Total the income statement and balance sheet columnsCalculate and enter the net income after federal income taxExtend the net income amountCalculate the column totals Draw double lines

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Audit Your Understanding

In what column is the income summary amount extended?It Depends on the Merchandise Inventory Balance: The Income Statement debit or credit column

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1% Error Rate…

200,000 incorrect prescriptions30,000 babies accidentally dropped by doctors and nurses4 days a year of contaminated waterNo electricity or heat for 15 minutes each dayNewspapers not delivered 4 times a year2 short or long landings by airliners

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Dream Car?