CHAPTER TWENTYTHREE CORPORATIONS EARNINGS AND DISTRIBUTIONS RETAINED EARNINGS

CHAPTER TWENTY-THREE CORPORATIONS: EARNINGS AND DISTRIBUTIONS

RETAINED EARNINGS Very few transactions affect the Retained Earnings account.

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

RETAINED EARNINGS NET LOSS NET INCOME DIVIDENDS APPROPRIATIONS Only three types of debits

CLOSING ENTRIES ÊClose revenue accounts to Income Summary • Same entry as sole proprietorships and partnerships ËClose expense accounts to Income Summary • Same entry as sole proprietorships and partnerships ÌClose Income Summary to RETAINED EARNINGS • Credit balance in Income Summary = Net Income • Debit balance in Income Summary = Net Loss ÍClose DIVIDENDS to RETAINED EARNINGS

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Income Summary PR DEBIT CREDIT 337, 000 Retained Earnings 5 6 7 8 9 10 11 Closing Entry #3 EXAMPLE: If the corporation has net income of $337, 000 for the period 337, 000

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

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

CORPORATION INCOME TAXES 3 A disadvantage of corporations is that they must pay income taxes. 3 Corporations estimate their annual income and make quarterly payments. 3 At end of accounting period, actual amount of income tax is determined. • if it differs from estimates…. ADJUSTING ENTRY is made

GENERAL JOURNAL DATE DESCRIPTION PR DEBIT CREDIT 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

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Income Tax Expense PR DEBIT CREDIT 40, 000 Cash Quarterly payments will be made on April 15, June 15, September 15 and December 15. $160, 000 ÷ 4 = $40, 000

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Income Tax Expense Cash Same entry made each quarter PR DEBIT CREDIT 40, 000

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

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Income Tax Expense PR DEBIT CREDIT 40, 000 Cash 40, 000 Income Tax Expense Income Tax Payable 3, 000 6 7 8 9 10 11 Cash Additional $3, 000 is paid when tax return is filed. 3, 000

CASH DIVIDEND 4 A distribution of corporate assets (cash) to stockholders 4 To be issued if corporation has: é Unrestricted retained earnings é Adequate cash balance é Declared a cash dividend • Only the Board of Directors can declare a dividend 4 Three key dates é Date of declaration, Date of record and Date of payment

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: Preferred Stock 4, 000 shares x $4 $16, 000 Common Stock 10, 000 shares x $2 $20, 000

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

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 No journal whether they owned the stock on the date of entry!!! declaration or on the date of payment.

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Feb. 20 Preferred Dividends Payable 16, 000 20 Common Dividends Payable Cash 7 10 11 16, 000 Cash 6 8 9 PR DEBIT CREDIT Date of Payment 20, 000

STOCK DIVIDEND 4 A proportionate distribution of shares of a corporation’s own stock to its stockholders 4 Several reasons for this type of dividend: éCompany may be short of cash éCompany may want to increase the marketability of its shares by lowering the price per share. éCorporation may want to transfer a portion of retained earnings to a paid-in capital to indicate that it is unavailable for dividends

STOCK DIVIDEND 4 Typically stated as a percentage of common stock outstanding 4 Date of Declaration journal entry varies depending on the dividend percentage Õ Dividends for less than 20 - 25% (Small) - Stock Dividend account is debited for the Market Value of the stock Õ Dividends more than 20 - 25% (Large) - Stock Dividend account is debited for the Par or Stated Value of the stock

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 x 10% 400 Shares to be distributed

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

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Mar. 5 Stock Dividends PR DEBIT CREDIT 4, 800 Stock Div. Distributable Stock Dividend Distributable account is credited for the par value. 400 shares x $5 par value 2, 000

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION PR DEBIT CREDIT Mar. 5 Stock Dividends Stock Div. Distributable Paid-In-Capital in Excess of Par - Common Stock 5 6 7 8 9 10 11 Difference between Market Value and Par Value 4, 800 2, 000 2, 800

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION PR DEBIT CREDIT Mar. 5 Stock Dividends Stock Div. Distributable Paid-In-Capital in Excess of Par - Common Stock 5 6 27 7 8 9 10 11 Date of Distribution 4, 800 2, 000 2, 800

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

LARGE STOCK DIVIDEND b. Recorded similarly to the small stock dividend, except: ÙStock Dividend account is debited for the PAR VALUE instead of the market value. ÙStock Dividend Distributable is recorded at PAR VALUE. ÙSince 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.

STOCK SPLITS b. Exchange one share of an old issue of stock for multiple shares of a new issue with a reduced par or stated value: ÙEXAMPLE: 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

GENERAL JOURNAL DATE 1 At 2 Declaration 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Retained Earnings Dividends Payable Cash Dividend Distribution of cash to stockholders xxx

GENERAL JOURNAL DATE 1 2 3 4 At 5 Payment 6 7 8 9 10 11 DESCRIPTION Retained Earnings PR DEBIT CREDIT xxx Dividends Payable Cash xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Retained Earnings 8 9 10 11 xxx Dividends Payable Cash 6 7 PR DEBIT CREDIT How do Cash Dividends effect the ASSETS? xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Retained Earnings Dividends Payable Cash 7 10 11 xxx Dividends Payable 6 8 9 PR DEBIT CREDIT Decreased xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Retained Earnings 8 9 10 11 xxx Dividends Payable Cash 6 7 PR DEBIT CREDIT How do they effect PAID-IN CAPITAL? xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Retained Earnings Dividends Payable Cash 7 10 11 xxx Dividends Payable 6 8 9 PR DEBIT CREDIT No Effect xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Retained Earnings 8 9 10 11 xxx Dividends Payable Cash 6 7 PR DEBIT CREDIT How do they effect RETAINED EARNINGS? xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Retained Earnings Dividends Payable Cash 7 10 11 xxx Dividends Payable 6 8 9 PR DEBIT CREDIT Decrease xxx xxx

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

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION PR DEBIT CREDIT Stock Dividends xxx Stock Div. Distributable Paid-In Capital in Excess of Par - Common Stock xxx 5 6 Stock Div. Distributable At Distribution 7 Common Stock 8 How do small Stock Dividends 9 effect the ASSETS? 10 11 xxx

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Stock Dividends PR DEBIT CREDIT xxx Stock Div. Distributable Paid-In Capital in Excess of Par - Common Stock xxx 5 6 7 8 9 10 11 Stock Div. Distributable Common Stock No Effect xxx

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Stock Dividends PR DEBIT CREDIT xxx Stock Div. Distributable Paid-In Capital in Excess of Par - Common Stock xxx 5 6 7 8 9 10 11 Stock Div. Distributable Common Stock How do they effect PAID-IN CAPITAL? xxx

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Stock Dividends PR DEBIT CREDIT xxx Stock Div. Distributable Paid-In Capital in Excess of Par - Common Stock xxx 5 6 7 8 9 10 11 Stock Div. Distributable Common Stock Increase by market value xxx

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Stock Dividends PR DEBIT CREDIT xxx Stock Div. Distributable Paid-In Capital in Excess of Par - Common Stock xxx 5 6 7 8 9 10 11 Stock Div. Distributable Common Stock How do they effect RETAINED EARNINGS? xxx

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Stock Dividends PR DEBIT CREDIT xxx Stock Div. Distributable Paid-In Capital in Excess of Par - Common Stock xxx 5 6 7 8 9 10 11 Stock Div. Distributable Common Stock Decrease by market value xxx

GENERAL JOURNAL DATE 1 At 2 Declaration 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Stock Dividends Stock Div. Distributable Stock Dividend (large) Distribution of corporation’s stock to stockholders xxx

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION PR DEBIT CREDIT Stock Dividends Stock Div. Distributable At 5 Distribution Common Stock 6 7 8 9 10 11 xxx How do large Stock Dividends effect the ASSETS? xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Stock Dividends 8 9 10 11 xxx Stock Div. Distributable Common Stock 6 7 PR DEBIT CREDIT No Effect xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Stock Dividends 8 9 10 11 xxx Stock Div. Distributable Common Stock 6 7 PR DEBIT CREDIT How do they effect PAID-IN CAPITAL? xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Stock Dividends 8 9 10 11 xxx Stock Div. Distributable Common Stock 6 7 PR DEBIT CREDIT Increase by par value xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Stock Dividends 8 9 10 11 xxx Stock Div. Distributable Common Stock 6 7 PR DEBIT CREDIT How do they effect RETAINED EARNINGS? xxx xxx

GENERAL JOURNAL DATE 1 2 3 4 5 DESCRIPTION Stock Dividends 8 9 10 11 xxx Stock Div. Distributable Common Stock 6 7 PR DEBIT CREDIT Decrease by par value xxx xxx

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

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

APPROPRIATIONS 4 A restriction of retained earnings by the board of directors for a specific purpose 4 Used primarily to limit the availability of retained earnings for paying dividends 4 Does not affect total retained earnings éJust separates it into “Appropriated” and “Unappropriated” 4 Does not affect cash or other assets

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 threeyear period. Let’s look at the Journal Entry.

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

Retained Earnings: Appropriated for treatment plant Unappropriated Total Retained Earnings $200, 000 700, 000 $900, 000

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

Sample Corporation Retained Earnings Statement For Year Ended December 31, 20 -Retained Earnings, January 1 Add Net Income for the year Less: Cash dividends Stock dividends Retained Earnings, December 31 $30, 000 20, 000 Similar to the Statement of Owner’s Equity $1, 100, 000 280, 000 $1, 380, 000 50, 000 $1, 330, 000

Chem Corporation Retained Earnings Statement For Year Ended December 31, 20 -2 Appropriated: Appropriated for treatment plant, Jan. 1 $200, 000 Current year appropriation (see below) 200, 000 Retained Earnings appropriated, Dec. 31 $400, 000 Unappropriated: Balance, January 1 $700, 000 Add net income for the year 280, 000 $980, 000 Less: Cash dividends $ 30, 000 Appropriated Retained Stock dividends 20, 000 Earnings is presented 250, 000 Transfer to approp. for treatment plant 200, 000 by first, followed Ret. Earnings unappropriated, Dec. unapppropriated 31 730, 000 $1, 130, 000 Total retained earnings, December 31

Chem Corporation Retained Earnings Statement For Year Ended December 31, 20 -2 Appropriated: Appropriated for treatment plant, Jan. 1 Current year appropriation (see below) Retained Earnings appropriated, Dec. 31 Unappropriated: Balance, January 1 Add net income for the year Less: Cash dividends Stock dividends Transfer to approp. for treatment plant Ret. Earnings unappropriated, Dec. 31 Total retained earnings, December 31 $200, 000 $400, 000 $700, 000 280, 000 $980, 000 $ 30, 000 200, 000 250, 000 Current year appropriations are shown twice 730, 000 $1, 130, 000