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.

Objective 1. Estimate The Federal Corporate Income Tax And Prepare Related Journal Entries.

Federal Income Tax Rates: Taxable IncomeTax Rate First $ 50,000 15% Next $ 25,000 25% Next $ 25,000 34% Next $235,000 39% Over $335,000See 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

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.

1.At the beginning of the year, Sports Outfitters Corporation estimated its tax liability for 2007 to be $35,976.

2.Sports Outfitters Corporation makes quarterly deposits during the year. ($35,976 ÷ 4 = $8,994) 2007 Apr. 15 Income Tax Expense 8, Cash 8, Quarterly income tax deposit.

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

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

When books are closed at year-end, the income tax expense is re-estimated. Year-End Adjustment of Tax Liability The Income Tax Expense account is adjusted Dec. 31 Income Tax Expense Income Tax Payable Estimate of additional tax due.

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

Deferred income taxes are the amount of taxes that will be payable in the future. ANSWER: QUESTION: What are deferred income taxes? They result from a difference between taxable income and income for financial statement purposes.

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.

Objective 2. Complete A Worksheet For A Corporation.

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.

Debit Credit 1,971,410 2,108,000 Corporate Worksheet Income Tax Adjustment Total the Income Statement Columns before the adjustment for income tax. Net income before tax 136,590

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 Corporate Worksheet Income Tax Adjustment Tax on $136,590 $36,520 Compute the income tax expense:

Compute the income tax adjustment: Corporate Worksheet Income 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

Record the income tax adjustment in the Adjustments section of the worksheet: Corporate Worksheet Income Tax Adjustment Income Tax Expense: $ debit Income Tax Payable: $ credit

Objective 3. Record Corporate Adjusting And Closing Entries.

Adjusting Journal Entries  Using the adjustments column of the worksheet, journalize all of the adjustments in the general journal.

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.

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 POST DATE DESCRIPTION REF. DEBIT CREDIT 2007 Dec. 31Income Summary 100, Retained Earnings 100,070.00

Objective 4. Prepare An Income Statement For A Corporation.

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.”

REVIEWREVIEW Estimated corporate income tax payments are made ________. Income tax expense can be reported on the income statement as a deduction after “Net Income Before Income Tax” or as a(n) ________________. operating expense quarterly Complete the following sentences: The major difference between worksheets for corporations and sole proprietorships is the ____________________ for corporations. income tax adjustment SECTION

REVIEWREVIEW ________________________ items are highly unusual, are clearly unrelated to routine operations, and do not frequently occur. Extraordinary, nonrecurring Complete the following sentences: Retained Earnings Income Summary The last entry to close a corporation’s books for the year closes the _______ ________ account to the ________________ account. SECTION

Thank You for using College Accounting, 11th Edition Price Haddock Brock