chapter 20 corporate accounting: earnings and distribution · • many corporations maintain a...
TRANSCRIPT
![Page 1: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/1.jpg)
1
Net income of a corporation and corporate income taxes
Cash dividends
Stock dividends
Stock splits
Appropriations of retained earnings
Retained Earnings Statement
Chapter 20 Corporate Accounting: Earnings and Distribution
![Page 2: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/2.jpg)
Net Income/Loss of A Corporation
2
Net Income AKA net loss The bottom line of the income statement for every
form of business
Income Summary account (after closing revenue and expenses) Credit balance = net income
Debit balance = net loss
For a corporation, the net income or net loss is closed to the Retained Earnings account.
The net income of a corporation is calculated in the same way as that of a proprietorship or a partnership.
![Page 3: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/3.jpg)
Example
3
• Assume on Dec. 31, 20X2, Ace Trucking, Inc. reports a net income of $72,500.
• Ace would record the following entry to close net income into the Retained Earnings account:
20X2
Dec. 31 Income Summary 72,500
Retained Earnings 72,500
• Assume on Dec. 31, 20X2 Ace Trucking, Inc. reports a net loss of $40,000.
• Ace would report the following entry to close net loss into the Retained Earnings account:
20X2
Dec. 31 Retained Earnings 40,000
Income Summary 40,000
![Page 4: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/4.jpg)
Corporate Income Tax The corporate income tax rate is a progressive rate; that is, the higher
the income, the higher the tax rate.
4
• Assume taxable income is $450,000.
• Corporate income tax would be calculated as following, using the corporate income tax rates:
$ 50,000 × .15 = $ 7,500
25,000 × .25 = 6,250
25,000 × .34 = 8,500
235,000 × .39 = 91,650
115,000 × .34 = 39,100
Total Tax = $153,000
![Page 5: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/5.jpg)
Paying Income Taxes: Corporations
• Pay-as-you-go
• Estimate annual income tax expense
• Make four quarterly payments
• April 15
• June 15
• September 15
• December 15
• Any tax still owed at year-end is accrued on Dec. 31 and must be paid by March 15 of the following year.
5
![Page 6: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/6.jpg)
Example: Paying Income Tax
• Assume Ace Trucking estimates income taxes for 20X1 to be $9,000.
• At Dec. 31, 20X1, Ace determines its total income tax for 20X1 to be $10,000.
• Ace records the following journal entries during 20X1 and its final tax payment for 20X1 taxes on Mar. 15, 20X2.
6
20X1
Apr. 15 Income Tax Expense 2,250
Cash 2,250
Jun. 15 Income Tax Expense 2,250
Cash 2,250
Sep. 15 Income Tax Expense 2,250
Cash 2,250
![Page 7: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/7.jpg)
7
20X1
Dec. 15 Income Tax Expense 2,250
Cash 2,250
Dec. 31 Income Tax Expense 1,000
Income Tax Payable 1,000
20X2
Mar. 15 Income Tax Payable 1,000
Cash 1,000
Example: Paying Income Tax (continued)
![Page 8: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/8.jpg)
Dividends • The distribution of corporate earnings • Investors in corporations buy stock with one basic goal in mind
— to receive a return on their investment • This goal can be accomplished in two ways:
• Stock grows in value, allowing investors to resell the stock for a gain
• Stockholders to receive a share of the corporation’s earnings
8
Cas
h D
ivid
end
s • The most common form of dividend
• Before a cash dividend can be declared and paid, three things are needed:
• Sufficient retained earnings above the legal capital requirement of the company
• Sufficient cash above working capital needs
• Formal action by the board of directors
![Page 9: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/9.jpg)
Dates Associated with a Cash Dividend
• Date of Declaration
• The date the board of directors formally declares that a dividend will be paid
• Date of Record
• The date as of which the ownership of shares is established
• Date of Payment
• The date that dividend checks are mailed to stockholders of record
• Many corporations maintain a constant dividend policy. IBM, for example, normally pays dividends on the 10th of March, June, September and December.
9
![Page 10: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/10.jpg)
Journal Entries for Cash Dividends • On Jan. 15, 20X1, the board of directors of Hudson Corporation
declares a $2 cash dividend for common stockholders of record on Jan. 31, to be paid on Feb.15.
• Hudson has 10,000 shares of $10 par common stock outstanding. • Journal entries are required on Jan. 15, 20X1 and on Feb. 15,
20X1. • No journal entry is required on Jan. 31, date of record.
10
20X1
Jan. 15 Cash Dividends 20,000
Dividends Payable 20,000
Feb. 15 Dividends Payable 20,000
Cash 20,000
![Page 11: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/11.jpg)
Dividends on Cumulative Preferred Stock
Assume Bonner Corporation has outstanding 5,000 shares of $100 par, 10% cumulative preferred stock and 50,000 shares of $5 par common stock.
11
![Page 12: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/12.jpg)
• On Jul. 2, 20X1, Hudson Corporation declares a 10% common stock dividend to common stockholders of record as of Aug. 10, to be distributed on Sep. 1.
• Hudson has 10,000 shares of $10 par common stock outstanding. Hudson’s common stock is current selling for $18 per share. Journal entries are required on Jul. 2, 20X1, and on Sep. 1, 20X1.
Stock Dividends
• A proportional distribution of additional shares of a company’s own authorized stock to its stockholders.
• Distributed on a pro rata basis • Additional shares of stock are issued in proportion to the
number of shares owned by each present stockholder. • For example, if a corporation declares a 10% stock dividend
and an investor currently owns 100 shares, the investor would receive an additional 10 shares of stock.
12
Example
![Page 13: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/13.jpg)
Example: Stock Dividends
• No journal entry is required on Aug. 10, date of record. • On date of declaration, the Stock Dividends account is debited for
the new shares issued times the current selling price of the stock. • The Common Stock Dividends Distributable account is credited for
the par value of the new shares issued. • Paid-in Capital in Excess of Par Value-Common is credited for the
difference.
13
20X1
Jul. 2 Stock Dividends 18,000
Common Stock Dividends Distributable 10,000
Paid-in Capital in Excess of Par-Common 8,000
Sep. 1 Common Stock Dividends Distributable 10,000
Common Stock 10,000
![Page 14: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/14.jpg)
Small Stock Dividend Versus Large Stock Dividend
• Small Stock Dividend
• A dividend that distributes less than 25% of the number of shares previously outstanding
• Large Stock Dividend
• A dividend that distributes 25% or more of the number of shares previously outstanding
• The Stock Dividends account is debited for the par value of the number of shares issued, not the current market value
14
![Page 15: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/15.jpg)
Stock Splits • Corporations sometimes call in their stock and issue two, three, or
more shares in place of each of the shares previously held by the stockholders.
• This process is called a stock split.
• Usually declared to reduce the market price per share, thereby making the stock easier for investors to afford.
• When a company splits its stock:
• The number of shares in the marketplace is increased.
• The share price of the stock is reduced.
• The number of a company’s unissued shares is also increased proportionate to the split.
15
![Page 16: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/16.jpg)
Example: Stock Splits
• Hudson Corporation currently has outstanding 50,000 shares of $10 par common stock outstanding.
• Hudson Corporation declares a 2-for-1 split.
• After the stock split, Hudson Corporation has 100,000 shares of $5 par common stock outstanding.
• A memorandum entry may be prepared to record the stock split.
16
![Page 17: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/17.jpg)
Appropriation of Retained Earnings
• We have learned that corporations must have sufficient retained earnings before dividends can be declared.
• Even with sufficient retained earnings, the board may want to limit the amount of retained earnings available for dividends.
• The board may vote to earmark or restrict a part of the retained earnings for a specific purpose, referred to as an appropriation of retained earnings.
• Assume the board of directors of Tagen Company decide to build a new building. Also assume on Mar. 1, 20X2, Tagen Company’s board of directors votes to restrict retained earnings at a rate of $60,000 per year for the next 5 years.
17
![Page 18: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/18.jpg)
Example: Restricted Retained Earnings
• Tagen Company would record the following journal entry each year:
• The transaction does not change the company’s total retained earnings nor set up a cash fund.
• The journal entry only limits the amount of retained earnings available for dividends.
18
20X2
Mar. 1 Retained Earnings 60,000
Retained Earnings Appropriated for Building 60,000
![Page 19: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/19.jpg)
Balance Sheet with Appropriated Retained Earnings
19
![Page 20: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/20.jpg)
Retained Earnings Statement A corporation prepares a retained earnings statement as opposed to a statement of owner’s equity for a proprietorship or partnership. Shows the changes in retained earnings for a period of time: (simple)
20
![Page 21: Chapter 20 Corporate Accounting: Earnings and Distribution · • Many corporations maintain a constant dividend policy. ... if a corporation declares a 10% stock dividend ... Slide](https://reader031.vdocuments.us/reader031/viewer/2022022008/5adf81927f8b9ad66b8cf129/html5/thumbnails/21.jpg)
Complex Retained Earnings Statement
21