1. 21-1 1-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 21-2 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.

3. 21-3 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.

4. 21-4 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

5. 21-5 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

6. 21-6 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.

7. 21-7 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

8. 21-8 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.” Prepare an income statement for a corporation Objective 4

9. 21-9 Corporate Earnings and Capital Transactions Section 2: Accounting for Retained Earnings Chapter 21 Section Objectives 5.Record the declaration and payment of cash dividends. 6.Record the declaration and issuance of stock dividends. 7. Record stock splits. 8. Record appropriations of retained earnings.

10. 21-10 Does not represent a cash fund. Are reinvested in: Inventory Plant and Equipment Various other types of assets May be distributed to stockholders. Appear in the Stockholders’ Equity section of the balance sheet. Retained Earnings

11. 21-11 To Record Cash Dividends Declaration Date: Debit: Retained Earnings Credit: Dividends Payable (Common or Preferred) Record Date: A list is made of the stockholders and the number of shares owned by each. Payment Date: Debit: Dividends Payable (Common or Preferred) Credit: Cash

12. 21-12 Stock Dividend A stock dividend is a distribution of corporation’s own stock. Made on a pro-rata basis. Results in a conversion of a portion of retained earnings to permanent capital. Involves the Common Stock Dividend Distributable account. Record the declaration and issuance of stock dividends Objective 6

13. 21-13 To Record Stock Dividends Declaration Debit: Retained Earnings Credit: Common Stock Dividend Distributable Credit: Paid-in Capital in Excess of Par—Common Stock Distribution Debit: Common Stock Dividend Distributable Credit: Common Stock

14. 21-14 Book Value For each class of stock, book value per share = equity ÷ shares outstanding Represents the total equity applicable to the class of stock divided by the number of shares outstanding. Remains the same before and after a stock dividend, but each shareholder owns more shares of stock with proportionately lower book value per share.

15. 21-15 Stock Split Occurs when a corporation issues two or more shares of new stock to replace each share outstanding without making changes to the capital accounts. Declared when stock is difficult to sell because of high market price. Does not change the capital account balances. Requires only a memorandum notation in the general journal. Record stock splits Objective 7

16. 21-16 An appropriation of retained earnings is a formal declaration of an intention to restrict dividends. ANSWER: QUESTION: What is an appropriation of retained earnings? Corporations restrict dividend payments in order to reinvest in plant assets or working capital Record appropriations of retained earnings Objective 8

17. 21-17 Corporate Earnings and Capital Transactions Section 3: Other Capital Transactions and Financial Statements Chapter 21 Section Objectives 9. Record a corporation’s receipt of donated assets. 10.Record treasury stock transactions. 11. Prepare financial statements for a corporation.

18. 21-18 The corporation has extra cash. The corporation offers treasury stock as incentive plans for officers. The corporation wants to create a demand for the stock, thus increasing its market value. The corporation can purchase shares from the stockholders who need cash or want to retire (privately held corporations). Why do corporations purchase their own stock? Treasury Stock Record treasury stock transactions Objective 10

19. 21-19 Financial Statements for a Corporation Income statement Statement of retained earnings Balance sheet Statement of cash flows Four financial statements are prepared for a corporation: Prepare financial statements for a corporation Objective 11