CHAPTER 14CHAPTER 14Benchmark 4 The accounting cycle forms the basis for all

accounting practices

DISTRIBUTING DIVIDENDS AND PREPARING A WORK SHEET FOR A

MERCHANDISING BUSINESS

*Chapter 6 p. 160 – work sheet

Distributing Corporate Earnings to

Stockholders

LESSON 14-1

•retained earnings•dividends•board of directors•declaring a dividend

Management decisions about future business operations are based on financial information – profit or loss, prepare tax reports

Corporation net income can be retained in business or paid to stockholders

STOCKHOLDERS’ EQUITY ACCOUNTS USED BY A CORPORATION(3000) STOCKHOLDERS’ EQUITY

3110 Capital Stock3120 Retained Earnings3130 Dividends3140 Income Summary

Share of stock – unit of ownership in corporation (stockholder)

Capital Stock – investment of all ownersRetained Earnings – corporation’s

earnings, not yet distributed to S/HDividends – earnings distributed to S/H,

temporary account similar to Drawing, DR each time declared

DECLARING A DIVIDENDBoard of directors – group elected by

stockholders to manage corporationDeclaring a dividend – board decides to

distribute corporate earningsDeclared on 1 datePaid on a later dateDividend is liability, normal DR balance

DECLARING A DIVIDEND

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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.

4. Write the debit amount.

3. Write the memorandum number.

2. Write the title of the account debited.

1. Write the date.

5. Write the title of the account credited.

6. Write the credit amount.

PAYING A DIVIDENDHobby Shack issues 1 check for total

dividends to be paid – deposited in special dividend checking account, separate check for each stockholder

PAYING A DIVIDEND

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

1. Write the date.

2. Write the account title.

3. Write the check number.

4. Write the debit account.

5. Write the credit amount.

14-1 Work Together p. 408

14-1 Work Together p. 408

Beginning an 8-Column Work Sheet for a

Merchandising Business

LESSON 14-2

Work SheetInformation needed to prepare

financial statements is summarizedUsed to plan adjustments Trial balance is entered first, all

general ledger accounts and balances entered in same order, even accounts with 0 balances

RECORDING A TRIAL BALANCE ON A WORK SHEET

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221. Account title

2. Account balance

3. Total, prove, and rule the debit and credit columns

Planning Adjustments Adjustments needed to bring accounts up to datePlanned on the worksheet – adjustments columnsBalances change when adjusting entries are journalized

and postedAdjustments

SuppliesPrepaid insuranceMerchandise inventoryUncollectible accounts expenseDepreciation expenseFederal income tax expense

Analyzing and recording adjustments

What is the balance?What should be the balance?What must be done to correct the account balance?

What adjustment is made?

ANALYZING AND RECORDING SUPPLIES ADJUSTMENTS

Adj. (a) 2,730.00

Supplies Expense—Office

Dec. 31 Bal. 3,480.00 Adj. (a) 2,730.00

(Adj Bal. 750.00)

Supplies—Office

Adj. (b) 2,910.00

Supplies Expense—Store

Dec. 31 Bal. 3,944.00 Adj. (b) 2,910.00

(Adj Bal. 1,034.00)

Supplies—Store

RECORDING SUPPLIES ADJUSTMENTS ON A WORK SHEET

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1. Write the debit amounts in the Adjustments Debit column.

2. Write the credit amounts in the Adjustments Credit column.

3. Label the two parts of the Supplies—Office adjustment with small letter a and small letter b in parentheses.

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ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT

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

2. Enter the same amount in the Adjustments Debit column.

3. Label the two parts of the adjustment with a small letter c in parentheses.

14-2 Work Together

14-2 Work Together

LESSON 14-3LESSON 14-3Planning and Recording a

Merchandise Inventory Adjustment•merchandise inventory – amount of goods on

hand for sale to customers• Asset• Normal debit balance

MERCHANDISE MERCHANDISE INVENTORYINVENTORY•Amount of merchandise increases each time merchandise is purchased, decreases when merchandise is sold

•All purchases recorded in purchases account

•All sales recorded in sales account

•Adjusted to reflect changes from purchases and sales

MERCHANDISE INVENTORY MERCHANDISE INVENTORY ADJUSTMENTADJUSTMENT•Merchandise inventory account adjusted to show current value of merchandise on hand

•Merchandise Inventory and Income Summary accounts

•Merchandise Inventory doesn’t have related expense account

ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT

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1. Write the debit amount.

3. Label the two parts of this adjustment with a small letter d in parentheses.

2. Write the credit amount.

ANALYZING AN ADJUSTMENT WHEN ENDING MERCHANDISE INVENTORY IS GREATER THAN BEGINNING MERCHANDISE INVENTORY

Jan. 1 Bal. 294,700.00

Adj. (d) 4,200.00

(New Bal. 298,900.00)

Merchandise Inventory

Adj. (d) 4,200.00

Income Summary

14-3 Work Together

14-3 Work Together

LESSON 14-4LESSON 14-4Planning and Recording an Allowance for Uncollectible

Accounts Adjustment•uncollectible accounts•allowance method of recording losses from uncollectible accounts•book value•book value of accounts receivable

With each sale on account, business takes a risk that customers won’t pay their accounts

Uncollectible accounts – account receivables that can’t be collected

At the end of the fiscal year, business doesn’t know which accounts will be uncollectible

Business can calculate an estimated amountDR Uncollectible Accounts ExpenseCR Allowance for Uncollectible Accounts

Contra account to Accounts Receivable

Book value – difference between asset’s account balance and its related contra account balance

ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS

ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE

EstimatedUncollectible

Accounts Expense=Percentage×

Total Saleson Account

$1,245.00=1%×$124,500.00

•Use percentage of total sales on account to estimate uncollectible accounts

•Use percentage based on previous experience

•Match expenses with revenue

1. Enter the estimated uncollectible amount.

ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE

3. Label the two parts with a small letter e in parentheses.

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2. Enter the same amount in the Adjustments Debit column.

Allowance for Uncollectible AccountsAdjustment is added to previous balanceNew balance is estimated amount that will

eventually become uncollectibleAccounts Receivable – Allowance for

Uncollectible Accounts = Book Value of Accounts Receivable

ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE

14-4 Work Together

14-4 Work Together

LESSON 14-5LESSON 14-5Planning and Recording

Depreciation Adjustments•current assets•plant assets•depreciation expense•estimated salvage value•straight-line method of depreciation•accumulated depreciation•book value of a plant asset

Categories of AssetsMost businesses use 2 categories for

assetsCurrent assets – cash and others that will

be used within a yearPlant assets – assets used for many years

(computer, furniture, cash register) – types: equipment, buildings, landBusiness buys to use in earning revenueP. 423 3rd paragraph

Depreciating Plant AssetsMatch revenue with expensesCost of plant asset expensed over plant

asset’s useful lifePortion of cost transferred to expense

account each fiscal period – depreciation expense

Factors in calculating depreciation expenseOriginal cost – all costs to make asset usable –

price, delivery, installationEstimated salvage value – dispose of asset

when no longer usable, amount expected to receive when remove asset (residual or scrap value)

Estimated useful life – total amount of depreciation expense distributed over estimated useful lifePhysical depreciation – wear and tearFunctional depreciation – inadequate or obsolete

CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE – straight-line depreciation (equal amount each year)

Estimated TotalDepreciation

Expense=

EstimatedSalvage 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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CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE

2007AccumulatedDepreciation

=2007

DepreciationExpense

+2006

AccumulatedDepreciation

$600.00=$200.00+$400.00

EndingBook Value

=AccumulatedDepreciation

–Original Cost

$650.00=$600.00–$1,250.00

•Accumulated depreciation – total amount of depreciation expense since asset purchased

•Book value – original cost –accumulated depreciation

ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE

• Important to retain original cost information for plant assets (don’t credit plant asset account)

• Record depreciation in Accumulated Depreciation – contra asset account• Normal credit balance

ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE

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1. Write the debit amounts.

2. Write the credit amounts.

3. Label the adjustments.

14-5 Work Together

14-5 Work Together

14-5 Work Together

14-5 On Your Own

LESSON 14-6LESSON 14-6

Calculating Federal Income Tax and

Completing a Work Sheet

Federal Income Tax AdjustmentCorporations who expect annual federal income

taxes >$500 must pay estimated taxes each quarter

Corporation only form of business organization that pays federal income taxes

Actual federal tax owed is calculated at end of fiscal year (must file annual return)

Additional tax owed note paid in quarterly installments must be paid when final return is filed

Federal income tax is an expense – amount depends on net income before tax is recorded

Federal Income Tax Adjustment Before federal income tax can be determined, all

adjustments must be completed and all amounts except Federal Income Tax Expense must be extended to the appropriate columns

To determine net income before federal income tax expense…

1. Complete all other adjustments2. Extend all amounts except Federal Income Tax

Expense to Income Statement or Balance Sheet columns

3. on separate paper, total work sheet income statement columns

4. Calculate difference between income statement debit column total and income statement credit column total

FEDERAL INCOME TAX EXPENSE ADJUSTMENT

Total of Income Statement Credit column $

500,253.10Less total of Income Statement Debit column before federal income tax

–396,049.91

Equals Net Income before Federal Income Tax $

104,203.19

Federal Income Tax Adjustment Income tax rates increase as amount of net

income increases 5 percentages are referred to as tax brackets Different tax percentages are applied to different

portions of net income to determine total federal income tax owed

CALCULATING FEDERAL INCOME TAX

p. 428

Hobby Shack estimated $18,000.00 federal income tax for the yearPaid $4,500 each quarter

Calculated $23,889.24 total federal tax based on net income before federal income tax

Owe additional $5,889.24 in taxesDR Federal Income Tax ExpenseCR Federal Income Tax Payable

1. Calculate the amount of federal income tax expense adjustment.

RECORDING THE FEDERAL INCOME TAX ADJUSTMENT

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2. Total and rule the Adjustments columns.

3. Extend account balances.

COMPLETING A WORK SHEET

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1. Total the Income Statement and Balance Sheet columns.

5. Rule double lines.

4. Calculate the column totals.

3. Extend the net income amount.

2. Calculate and enter the net income after federal income tax.

•after federal income tax adjustment is recorded, can complete work sheet•Net income after federal income tax •Cash to dividends – balance sheet•Income summary to federal income tax expense – income statement

A COMPLETED 8-COLUMN WORK SHEET

A 10-COLUMN WORK SHEET

1. Trial balance

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5. Extend balances

2. Adjustments

3. Extend adjusted balances

4. Total, prove, and rule

6. Calculate net income; total, prove and rule

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14-6 Work Together

14-6 Work Together

14-2-6 On Your Own

Adjusting EntriesAdjusting EntriesSupplies

DR Supplies ExpenseCR Supplies

Insurance DR Insurance ExpenseCR Prepaid Insurance

Merchandise Inventory Ending inventory higher

DR Merchandise InventoryCR Income Summary

Ending inventory lowerDR Income SummaryCR Merchandise Inventory

Adjusting EntriesAdjusting EntriesUncollectible Accounts

DR Uncollectible Accounts ExpenseCR Allowance for Uncollectible Accounts

Depreciation DR Depreciation ExpenseCR Accumulated Depreciation

Federal Income Tax DR Federal Income Tax ExpenseCR Federal Income Tax Payable