chap021 corporate earnings, taxes, and distributions

8/2/2019 Chap021 Corporate Earnings, Taxes, And Distributions

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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Chapter 21

Corporate

Earnings, Taxes,

and Distributions



21-2

Learning Objective 1Compute and record corporate income tax.

Taxable income

Less income taxes= Net income

Corporations pay taxes basedon their taxable income.

× Tax Rate = Tax Liability

Level Amount

1st 50,000$ 15% 7,500$

2nd 25,000 25% 6,250

3rd 25,000 34% 8,500

4th 110,000 39% 42,900

Total 210,000$ 65,150$

Taxable Income

Surf Outlet expects taxable income of $210,000 for 2010.Its estimated tax liability is computed as follows:

Apr. 15 Income Tax Expense 16,287.50

Cash (1/4 × $65,150) 16,287.50

The entry to record the first quarterly payment on April 15 is:

LO1

Surf Outlet’s quarterly tax payments are$16,287.50 ($65,150/4 quarters). Werecord the entry for the first quarterlyincome tax payment on April 15 bydebiting Income Tax Expense for$16,287.50 and crediting Cash for the

same amount.



21-3

Adjusting Tax Liability to Amount Owed Based on ActualTaxable Income

Tax payments made in 2010 65,150.00$Tax liability in 2010 59,016.47

Tax refund 6,133.53$

Dec. 31 Income Tax Refund Receivable 6,133.53 Income Tax Expense 6,133.53

The entry to recordthe tax refundreceivable on

December 31 is:

Overpaymentof Taxes

Underpaymentof Taxes

Tax payments made in 2010 65,150.00$

Tax liability in 2010 66,586.37 Additional taxes owed (1,436.37)$

The entry to record theadditional tax payable

on December 31 is

Dec. 31 Income Tax Expense 1,436.37

Income Tax Payable 1,436.37

LO1



21-4

Date of Declaration

Record liabilityfor dividend.

Jan. 19 Retained Earnings 10,000

Common Dividend Payable 10,000

Declared $1 per share cash dividend

On January 19, a $1 per share cashdividend is declared on Dana, Inc.’s10,000 common shares outstanding.

The dividend will be paid on March 19to stockholders of record on February 19.

Date of Record

No entry

required.

No entry required onFebruary 19.

Learning Objective 2Record transactions involving cash dividends.

LO2



21-5

Date of Payment

Record payment of

cash to stockholders.

Mar. 19 Common Dividend Payable 10,000 Cash 10,000

Paid $1 per share cash dividend

Entries for Cash Dividends

On January 19, a $1 per share cashdividend is declared on Dana, Inc.’s10,000 common shares outstanding.

The dividend will be paid on March 19

to stockholders of record on February 19.

LO2



21-6

The corporation distributes additionalshares of its own stock to its stockholderswithout receiving any payment in return.

Why a stock dividend?

•Can be used to keep the marketprice of the stock affordable.

•Can provide evidence ofmanagement’s confidence that the company is doing well.

HotAir, Inc.Common Stock

100 shares

$1 par

Learning Objective 3Account for stock dividends and stock splits.

LO3


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Dec. 31 Retained Earnings 20,000

Common Stock Dividend Distributable 2,000

Paid-In Capital in Excess

of Par Value 18,000 Declared a 2,000 share (2%) stock dividend

Recording a Small Stock DividendOn 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 make the 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’s

make the January 20 entry.

LO3

Jan. 20 Common Stock Dividend Distributable 2,000

Common Stock, $1 Par Value 2,000

To record issuance of common stock dividend



Dec. 31 Retained Earnings 20,000

Common Stock Dividend Distributable 20,000

Declared a 20,000 share (40%) stock dividend

Recording a Large Stock DividendOn 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 atpar value per share.

LO3

A stock split is the distribution of additional shares to stockholdersaccording to their percent ownership.

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 pershare to about $44 per share.

The split does not affect any balance sheet amounts or any individualstockholder’s percent ownership. Both the Paid-In Capital and Retained Earningsaccounts are unchanged by a split, and no journal entry is made.



Example: Consider the following Stockholders’

Equity Section of a Balance Sheet

Learning Objective 4Distribute dividends between common stock and preferred stock.

Dividend Preference of Preferred Stock

See how this dividendis distributed if thepreferred stock is

cumulative and if it isnoncumulative.

LO4

Preferred stock, 9%, $100 par value; 1,000

shares authorized, issued and outstanding 100,000

Common stock, $5 par value; 40,000 shares

authorized, issued and outstanding 200,000$

Total Paid-In capital 300,000$

If Preferred Stock is Noncumulative: Preferred Common

Year 2009: No dividends paid. -$ -$

Year 2010:

1. Pay 2010 preferred dividend. 9,000$

2. Remainder goes to common. 33,000$

If Preferred Stock is Cumulative: Preferred Common

Year 2009: No dividends paid. -$ -$

Year 2010:

1. Pay 2009 preferred dividend in arrears 9,000$

2. Pay 2010 preferred dividend. 9,000

3. Remainder goes to common. 24,000$

Totals 18,000$ 24,000$



On May 8, Whitt, Inc. purchased 2,000 of its own

shares of stock in the open market for $8,000.

May 8 Treasury Stock, Common 8,000

Cash 8,000

Purchase 2,000 treasury shares

at $4 per share

Learning Objective 5Record purchases and sales of treasury stock.

Selling Treasury Stock at CostOn June 30, Whitt sold 100 shares of its treasury

stock for $4 per share.

June 30 Cash 400

Treasury Stock, Common 400

Sold 100 shares of treasury

for $4 per share

LO5



On July 19, Whitt, Inc. sold an additional 500 shares of its

treasury stock for $8 per share.Shares Per Share Tota l

Sale 500 8.00$ 4,000$

Cost 500 4.00 2,000

Paid-In Capital 2,000$

July 19 Cash 4,000

Treasury Stock, Common 2,000

Paid-In Capital, Treasury Stock 2,000

Sold 500 treasury shares for $8 per share

Selling Treasury Stock Above Cost

Selling Treasury Stock Below Cost

Shares Per Share TotalCost 400 4.00$ 1,600$

Sale 400 1.50 600

Difference 1,000$

Aug. 27 Cash 600

1,000

Treasury stock, Common 1,600

Sold 400 treasury shares for $1.50 per share

Paid-in Capital, Treasury Stock

LO5



Learning Objective 6Describe events that can affect retained earnings.

A corporation’s directors can voluntarily limit

dividends because of a special need for cash suchas the purchase of new facilities.

Retained earnings can have legal or contractualrestrictions. In most states, the corporate charters willnot allow companies to purchase treasury stock inexcess of the balance in retained earnings.

Some loan agreements place restrictions onhow much dividends can be based on thebalance in retained earnings.

LO6



Retained earnings, 12/31/09 875,000$

Plus: net income 155,600

Less: dividends declared (80,000)

Retained earnings, 12/31/10 950,600$

Reed, Inc.

Statement of Retained EarningsFor Year Ended December 31, 2010

Learning Objective 7Prepare a statement of retained earnings.

The Statement of Retained Earnings is a summary of the activity thatoccurred in Retained Earnings during the period

LO7



(In millions) Retained

Shares Amount Earnings Total

Balance at January 1, 2010 821 2,500$ 9,500$ 12,000$Stock sales 17 500 500

Stock repurchases and retirement (17) (260) (925) (1,185)

Cash dividends declared (150) (150)

Other, net 70 70

Net income 5,100 5,100

Balance at December 31, 2010 821 2,740$ 13,595$ 16,335$

Common stock and

capital in excess of par

Matrix, Inc.Statement of Stockholders' Equity

For the Year Ended December 31, 2010

Many companies issue a Statement of Stockholders’ Equity

rather than the Statement of Retained Earnings. TheStatement of Stockholders’ Equity is more inclusive anddiscloses changes in all equity accounts, not just RetainedEarnings.

Learning Objective 8Prepare a statement of stockholders’ equity.

LO8

LO



Learning Objective 9Compute earnings per share and describe its use.

Basicearnings

per share

= Net income - Preferred dividends

Weighted-average common shares outstanding

LO9

LO10



This measure is often used by investors as a

general guideline in gauging relative stock values.

Learning Objective 10Compute price-earnings ratio and describe its use.

LO10

PERatio

=Market price per common share

Earnings per share

LO11



Learning Objective 11Compute dividend yield and explain its use.

DividendYield

=Annual cash dividends per share

Market value per share

This ratio identifies the return, in terms of cashdividends, on the current market price of the

stock.

LO11


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End of Chapter 21

chap021 corporate earnings, taxes, and distributions

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