Chapter 21
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Chapter 21. Corporate Earnings, Taxes, and Distributions. LO1. The entry to record the first quarterly payment on April 15 is:. Learning Objective 1 Compute and record corporate income tax. Corporations pay taxes based on their taxable income.

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Chapter 21

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Chapter 21

Chapter 21

Corporate

Earnings, Taxes,

and Distributions


Learning objective 1 compute and record corporate income tax

LO1

The entry to record the first quarterly payment on April 15 is:

Learning Objective 1Compute and record corporate income tax.

Corporations pay taxes based

on their taxable income.

Surf Outlet expects taxable income of $210,000 for 2010.Its estimated tax liability is computed as follows:

Surf Outlet’s quarterly tax payments are $16,287.50 ($65,150/4 quarters). We record the entry for the first quarterly income tax payment on April 15 by debiting Income Tax Expense for $16,287.50 and crediting Cash for the same amount.


Adjusting tax liability to amount owed based on actual taxable income

LO1

The entry to record the tax refund receivable on December 31 is:

Adjusting Tax Liability to Amount Owed Based on Actual Taxable Income

Overpayment of Taxes

Underpayment of Taxes

The entry to record the additional tax payable on December 31 is


Chapter 21

LO2

Learning Objective 2

Record transactions involving cash dividends.

Dividends

On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding.The dividend will be paid on March 19to stockholders of record on February 19.

Date of Declaration

Record liability

for dividend.

No entry required on February 19.

Date of Record

No entry

required.


Entries for cash dividends

LO2

Entries for Cash Dividends

On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding.The dividend will be paid on March 19to stockholders of record on February 19.

Date of Payment

Record payment of

cash to stockholders.


Learning objective 3 account for stock dividends and stock splits

LO3

100 shares

HotAir, Inc.

Common Stock

$1 par

Learning Objective 3Account for stock dividends and stock splits.

The corporation distributes additional shares of its own stock to its stockholders without receiving any payment in return.

  • Why a stock dividend?

  • Can be used to keep the market

  • price of the stock affordable.

  • Can provide evidence of

  • management’s confidence that

  • the company is doing well.


Recording a small stock dividend

LO3

Recording a Small Stock Dividend

On December 31, 2010, Quest declared a 2% stock dividend, when its stock was selling for$10 per share. The stock will be distributed to stockholders on January 20, 2011. Let’s makethe December 31 entry.

On December 31, 2010, Quest declared a 2% stock dividend, when its stock was selling for$10 per share. The stock will be distributed to stockholders on January 20, 2011. Now let’smake the January 20 entry.


Recording a large stock dividend

LO3

Recording a Large Stock Dividend

On December 31, 2010, Router declared a 40% stock dividend, when its stock was selling for $8 per share. State law requires that large stock dividends be capitalized at par value per share.

A 2-for-1 stock split replaces 100,000 shares of $20 par value stock with 200,000 shares of $10 par value stock. Market value is reduced from $88 per share to about $44 per share.

A stock split is the distribution of additional shares to stockholders according to their percent ownership.

The split does not affect any balance sheet amounts or any individual stockholder’s percent ownership. Both the Paid-In Capital and Retained Earnings accounts are unchanged by a split, and no journal entry is made.


Chapter 21

LO4

Learning Objective 4Distribute dividends between common stock and preferred stock.Dividend Preference of Preferred Stock

Example: Consider the following Stockholders’ Equity Section of a Balance Sheet

See how this dividend is distributed if the preferred stock is cumulative and if it is noncumulative.


Learning objective 5 record purchases and sales of treasury stock

LO5

Learning Objective 5Record purchases and sales of treasury stock.

On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $8,000.

Selling Treasury Stock at Cost

On June 30, Whitt sold 100 shares of its treasury stock for $4 per share.


Selling treasury stock above cost

LO5

Selling Treasury Stock Above Cost

On July 19, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per share.

Selling Treasury Stock Below Cost


Learning objective 6 describe events that can affect retained earnings

LO6

Learning Objective 6Describe events that can affect retained earnings.

Retained earnings can have legal or contractual restrictions. In most states, the corporate charters will not allow companies to purchase treasury stock in excess of the balance in retained earnings.

Some loan agreements place restrictions on how much dividends can be based on the balance in retained earnings.

A corporation’s directors can voluntarily limit dividends because of a special need for cash such as the purchase of new facilities.


Learning objective 7 prepare a statement of retained earnings

LO7

Learning Objective 7Prepare a statement of retained earnings.

The Statement of Retained Earnings is a summary of the activity that occurred in Retained Earnings during the period


Learning objective 8 prepare a statement of stockholders equity

LO8

Learning Objective 8Prepare a statement of stockholders’ equity.

Many companies issue a Statement of Stockholders’ Equity rather than the Statement of Retained Earnings. The Statement of Stockholders’ Equity is more inclusive and discloses changes in all equity accounts, not just Retained Earnings.


Chapter 21

LO9

Basicearnings

per share

Net income - Preferred dividends

Weighted-average common shares outstanding

=

Learning Objective 9

Compute earnings per share and describe its use.


Learning objective 10 compute price earnings ratio and describe its use

LO10

Market price per common share

Earnings per share

PERatio

=

Learning Objective 10Compute price-earnings ratio and describe its use.

This measure is often used by investors as ageneral guideline in gauging relative stock values.


Chapter 21

LO11

Dividend

Yield

Annual cash dividends per share

Market value per share

=

Learning Objective 11

Compute dividend yield and explain its use.

This ratio identifies the return, in terms of cashdividends, on the current market price of the stock.


End of chapter 21

End of Chapter 21


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