1. CHAPTER TWENTY-THREE CORPORATIONS: EARNINGS AND DISTRIBUTIONS

2. RETAINED EARNINGS Very few transactions affect the Retained Earnings account.

3. RETAINED EARNINGS Usually the only credit is the Net Income. NET INCOME

4. RETAINED EARNINGS Only three types of debits NET INCOMENET LOSS DIVIDENDS APPROPRIATIONS

5. CLOSING ENTRIES  Close revenue accounts to Income Summary Same entry as sole proprietorships and partnerships  Close expense accounts to Income Summary Same entry as sole proprietorships and partnerships  Close Income Summary to RETAINED EARNINGS Credit balance in Income Summary = Net Income Debit balance in Income Summary = Net Loss  Close DIVIDENDS to RETAINED EARNINGS

6. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Income Summary337,000 Retained Earnings Closing Entry #3 EXAMPLE: If the corporation has net income of $337,000 for the period 337,000

7. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Income Summary 52,000Retained Earnings What if the corporation has a NET LOSS of $52,000? 52,000

8. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Dividends 30,000Retained Earnings Closing Entry #4 EXAMPLE If the corporation declares $30,000 in dividends…. 30,000

9. CORPORATION INCOME TAXES  A disadvantage of corporations is that they must pay income taxes.  Corporations estimate their annual income and make quarterly payments.  At end of accounting period, actual amount of income tax is determined. if it differs from estimates….ADJUSTING ENTRY is made

10. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 EXAMPLE: If the corporation estimates its income taxes for 20-1 will be $160,000

11. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Income Tax Expense40,000 Cash40,000 Quarterly payments will be made on April 15, June 15, September 15 and December 15. $160,000 ÷ 4 = $40,000

12. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Income Tax Expense40,000 Cash Same entry made each quarter 40,000

13. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Income Tax Expense 40,000 Cash At the end of the year, actual income taxes are calculated as $163,000…. $3,000 more than estimated ADJUSTING ENTRY needed. 40,000 Income Tax Expense3,000 Income Tax Payable3,000

14. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Income Tax Expense 40,000 Cash40,000 Income Tax Expense3,000 Income Tax Payable3,000 Income Tax Payable3,000 Cash3,000 Additional $3,000 is paid when tax return is filed.

15. CASH DIVIDEND  A distribution of corporate assets (cash) to stockholders.  To be issued if corporation has: o Unrestricted retained earnings o Adequate cash balance o Declared a cash dividend Only the Board of Directors can declare a dividend  Three key dates: o Date of declaration, Date of record and Date of payment

16. CASH DIVIDENDS EXAMPLE: On February 1 the board of directors declares a dividend of $4 per share on 4,000 shares of preferred stock, and a dividend of $2 per share of 10,000 shares of common stock. Both dividends are payable on February 20 to stockholders of record on February 10. DATE OF DECLARATION: 4,000shares x $4 $16,000 10,000shares x $2 $20,000 Preferred Stock Common Stock

17. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Cash Dividends16,000 Preferred Dividends Payable Separate entries are made for each type of stock. 16,000 Feb.1 1Cash Dividends Common Dividends Payable 20,000

18. CASH DIVIDENDS EXAMPLE: On February 1 the board of directors declares a dividend of $4 per share on 4,000 shares of preferred stock and a dividend of $2 per share of 10,000 shares of common stock. Both dividends are payable on February 20 to stockholders of record on February 10. DATE OF RECORD: Stockholders who own the stock on the Date of Record will receive the dividend. Regardless of whether they owned the stock on the date of declaration or on the date of payment. No journal entry!!!

19. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 16,000Preferred Dividends Payable Date of Payment 16,000 Feb.20 Common Dividends Payable 20,000 Cash

20. STOCK DIVIDEND  A proportionate distribution of shares of a corporation’s own stock to its stockholders  Several reasons for this type of dividend: oCompany may be short of cash oCompany may want to increase the marketability of its shares by lowering the price per share. oCorporation may want to transfer a portion of retained earnings to a paid-in capital to indicate that it is unavailable for dividends

21. STOCK DIVIDEND  Typically stated as a percentage of common stock outstanding  Date of Declaration journal entry varies depending on the dividend percentage oDividends for less than 20 - 25% (Small) Stock Dividend account is debited for the Market Value of the stock oDividends more than 20 - 25% (Large) Stock Dividend account is debited for the Par or Stated Value of the stock

22. SMALL STOCK DIVIDEND EXAMPLE: Diven Corp. has 4,000 share of $5 par common stock outstanding. Diven declares a 10% stock dividend on March 5, payable on March 27 to stockholders of record on March 14. The market value of Diven’s common stock on the date of declaration is $12 per share. 4,000 Shares to be distributed x 10% 400

23. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividends4,800 Small stock dividends…. Stock Dividend account is debited for the Market Value of the shares to be distributed. 400 shares x $12 market value Mar.5

24. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividends4,800 Stock Div. Distributable Stock Dividend Distributable account is credited for the par value. 400 shares x $5 par value 2,000 Mar.5

25. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividends4,800 Stock Div. Distributable Difference between Market Value and Par Value 2,000 Mar.5 Paid-In-Capital in Excess of Par - Common Stock2,800

26. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividends4,800 Stock Div. Distributable Date of Distribution 2,000 Mar.5 Paid-In-Capital in Excess of Par - Common Stock2,800 27

27. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividends4,800 Stock Div. Distributable2,000 Mar.5 Paid-In-Capital in Excess of Par - Common Stock2,800 27Stock Div. Distributable 2,000 Common Stock2,000 Reported as an addition to Common Stock on the Balance Sheet

28. LARGE STOCK DIVIDEND  Recorded similarly to the small stock dividend, except: o Stock Dividend account is debited for the PAR VALUE instead of the market value. o Stock Dividend Distributable is recorded at PAR VALUE. o Since both the debit and credit are the same (par value)…there is no need for the Paid-In Capital in Excess of Par - Common Stock account.

29. STOCK SPLITS  Exchange one share of an old issue of stock for multiple shares of a new issue with a reduced par or stated value: o EXAMPLE: Splice Corp. has 10,000 shares of $10 par common stock outstanding. Splice declares a two-for-one stock split. Why? - To improve marketability of the shares by reducing par value…leading to wider ownership of the stock Each shareholder will receive two shares of the new $5 par value stock in return for each share of the old $10 par value stock

30. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Retained Earningsxxx Dividends Payable Cash Dividend Distribution of cash to stockholders xxx At Declaration

31. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Retained Earningsxxx Dividends Payablexxx At Payment Dividends Payable Cash xxx

32. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Retained Earningsxxx Dividends Payablexxx Dividends Payable Cash xxx How do Cash Dividends effect the ASSETS?

33. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Retained Earningsxxx Dividends Payablexxx Dividends Payable Cash xxx Decreased

34. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Retained Earningsxxx Dividends Payablexxx Dividends Payable Cash xxx How do they effect PAID-IN CAPITAL?

35. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Retained Earningsxxx Dividends Payablexxx Dividends Payable Cash xxx No Effect

36. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Retained Earningsxxx Dividends Payablexxx Dividends Payable Cash xxx How do they effect RETAINED EARNINGS?

37. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Retained Earningsxxx Dividends Payablexxx Dividends Payable Cash xxx Decrease

38. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributable Stock Dividend (small) Distribution of corporation’s stock to stockholders xxx At Declaration Paid-In Capital in Excess of Par - Common Stockxxx

39. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx At Distribution Paid-In Capital in Excess of Par - Common Stockxxx Stock Div. Distributable Common Stock xxx How do small Stock Dividends effect the ASSETS?

40. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx Paid-In Capital in Excess of Par - Common Stockxxx Stock Div. Distributable Common Stock xxx No Effect

41. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx Paid-In Capital in Excess of Par - Common Stockxxx Stock Div. Distributable Common Stock xxx How do they effect PAID-IN CAPITAL?

42. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx Paid-In Capital in Excess of Par - Common Stockxxx Stock Div. Distributable Common Stock xxx Increase by market value

43. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx Paid-In Capital in Excess of Par - Common Stockxxx Stock Div. Distributable Common Stock xxx How do they effect RETAINED EARNINGS?

44. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx Paid-In Capital in Excess of Par - Common Stockxxx Stock Div. Distributable Common Stock xxx Decrease by market value

45. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributable Stock Dividend (large) Distribution of corporation’s stock to stockholders xxx At Declaration

46. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx At Distribution Stock Div. Distributable Common Stock xxx How do large Stock Dividends effect the ASSETS?

47. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx Stock Div. Distributable Common Stock xxx No Effect

48. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx Stock Div. Distributable Common Stock xxx How do they effect PAID-IN CAPITAL?

49. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx Stock Div. Distributable Common Stock xxx Increase by par value

50. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx Stock Div. Distributable Common Stock xxx How do they effect RETAINED EARNINGS?

51. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Stock Dividendsxxx Stock Div. Distributablexxx Stock Div. Distributable Common Stock xxx Decrease by par value

52. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Memo Notation Stock Split Exchange of old stock for multiple shares of new stock No Journal Entry, just a memo in journal

53. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Memo Notation Because there is no entry, there is no effect on ASSETS, PAID-IN CAPITAL or RETAINED EARNINGS.

54. APPROPRIATIONS  A restriction of retained earnings by the board of directors for a specific purpose  Used primarily to limit the availability of retained earnings for paying dividends  Does not affect total retained earnings oJust separates it into “Appropriated” and “Unappropriated”  Does not affect cash or other assets

55. APPROPRIATIONS EXAMPLE: Chem Corp. has decided to build a new waste treatment plant. Chem Corp. has a retained earnings balance of $900,000. To finance a portion of the plant (and to inform people of its concern for the environment), the board of directors decides to appropriate $600,000 of retained earnings over a three- year period. Let’s look at the Journal Entry.

56. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Retained Earnings $600,000 ÷ 3 years Same entry is made at the end of each of the three years. Retained Earnings Approp. for Treatment Plant 200,000

57. Retained Earnings Retained Earnings: Appropriated for treatment plant$200,000 Unappropriated700,000 Total Retained Earnings$900,000

58. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Retained Earnings Approp. After the treatment plant is completed, the appropriation is no longer needed. Retained Earnings 600,000

59. Retained Earnings Statement $1,100,000Retained Earnings, January 1 $30,000 Add Net Income for the year280,000 Sample Corporation For Year Ended December 31, 20-- Less: Cash dividends Stock dividends20,00050,000 Retained Earnings, December 31 $1,380,000 $1,330,000 Similar to the Statement of Owner’s Equity

60. Retained Earnings Statement $200,000 Appropriated: $700,000 Appropriated for treatment plant, Jan. 1 200,000 Chem Corporation For Year Ended December 31, 20-2 Retained Earnings appropriated, Dec. 31 Unappropriated: 280,000 200,000 Balance, January 1 $400,000 Current year appropriation (see below) Add net income for the year Less: Cash dividends$ 30,000 $980,000 Stock dividends 20,000 Transfer to approp. for treatment plant 250,000 Ret. Earnings unappropriated, Dec. 31730,000 Total retained earnings, December 31 $1,130,000 Appropriated Retained Earnings is presented first, followed by unapppropriated

61. Retained Earnings Statement $200,000 Appropriated: $700,000 Appropriated for treatment plant, Jan. 1 200,000 Chem Corporation For Year Ended December 31, 20-2 Retained Earnings appropriated, Dec. 31 Unappropriated: 280,000 200,000 Balance, January 1 $400,000 Current year appropriation (see below) Add net income for the year Less: Cash dividends$ 30,000 $980,000 Stock dividends 20,000 Transfer to approp. for treatment plant 250,000 Ret. Earnings unappropriated, Dec. 31730,000 Total retained earnings, December 31 $1,130,000 Current year appropriations are shown twice