Distributing Dividends & Preparing Work Sheet Chapter 14 Distributing Dividends & Preparing Work Sheet

Stockholder’s Equity 3110 Capital Stock 3120 Retained Earnings 3130 Dividends 3140 Income Summary

Retained Earnings Amount earned by a corporation and not yet distributed to stockholders Used to record a corporations earnings

Dividends Earnings distributed to stockholders Income given to stockholders as a return on their investment Similar to drawing acct Dividends are “declared” and then later “distributed”

Declaring a Dividend December 15 – Hobby Shack declare a quarterly dividend of $2.00 per share; capital stock issued is 2,500 shares; total dividend $5,000 A group of persons elected by stockholders to manage corporation is board of directors The board distribute corporate earnings to stockholders by declaring a dividend Declared on one date Paid on a later date

Paying a Dividend January 15 – Paid cash for quarterly dividend declared on Dec 15, $5,000. Check is issued into a special dividend checking account Separate check for each stockholder is drawn from this account

Work Sheet Trial Balance Adjustments All general ledger accounts and balances Adjustments Supplies Prepaid insurance Merchandise inventory Uncollectible accounts expense Depreciation expense Federal income tax expense

Merchandise Inventory Amount of goods on hand for sale to customers is merchandise inventory Changes resulting from purchasing and sales transactions are NOT recorded here Merchandise inventory must be adjusted to reflect changes Can be an INCREASE or a DECREASE (use Income Summary to adjust)

Allowance for Uncollectible Account Adjustment Accounts receivable that cannot be collected are called uncollectible accounts Risk of doing business Recorded as an expense Business does not know which customer accounts will become uncollectible

Allowance for Uncollectible Account Adjustment To record estimated uncollectible accounts, adjustment made to two accounts Dr to Uncollectible accounts expense Cr to Allowance for uncollectible accounts Contra account to Accounts receivable Crediting the estimated value of uncollectable accounts to a contra account is called allowance method of recording losses

Estimating Uncollectible Accts Expense Businesses use a percentage of total sales on account Each is a risk of loss Hobby Shack uses estimated 1% of total sales on account

Depreciation Adjustments Current Assets Cash and other assets expected to be consumed within a year Plant Assets Assets used for number of years in operation of business Equipment, buildings, land

Depreciating Plant Assets Business buys plant assets to use in earning revenue Each will only be useful for a limited time period To match revenue with expenses the cost of plant asset should be expensed over the asset’s useful life Portion of asset’s cost transferred to expense account each fiscal period that asset is used to earn revenue Depreciation Expense

Calculating Depreciation Original Cost includes costs paid to make asset usable Estimated Salvage Value amount received for asset at time of disposal Estimated Useful Life Amount of time asset will be useful Physical depreciation Functional depreciation

Calculating Depreciation Straight Line Depreciation Charging equal amount of depreciation expense for a plant asset each year of useful life

Calculating Depreciation Accumulated Depreciation Total amount of depreciation expense recorded since purchase of plant asset Book Value Original cost of asset minus accumulated depreciation

Federal Income Tax Expense Adjustment Estimated income tax is paid quarterly April, june, september, december Actual federal income tax owed calculated at end of fiscal year Corporation must file annual return Any additional tax owed that was not paid quarterly must be paid in full

Federal Income Tax Expense Adjustment Hobby Shack estimated $18,000 in federal income tax for year Paid $4,500 each quarter (= $18,000) Each payment is recorded as: DR to Federal Income Tax Expense CR to Cash However…. The amount of tax depends on NET INCOME before the tax is recorded

Calculating Net Income Before Complete ALL OTHER ADJUSTMENTS Extend all amounts (IS & BS columns) EXCEPT Federal Income Tax Expense On separate paper – total Income Statement Debit & Credit columns Calculate difference (Cr – Dr) That is “NET INCOME BEFORE TAXES”

Calculating Federal Income Tax

Recording Fed Inc Tax Exp Adjustment After calculating amount of federal income tax expense Adjustment is difference between federal income tax for year and taxes paid Trial balance (-) calculation Adjustment affects: Federal Income Tax Expense Federal Income Tax Payable

Completing the Work Sheet AFTER adjustment for federal income tax expense is recorded – can now complete worksheet Income statement column totals new used to calculate NET INCOME AFTER TAX