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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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.
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
Learning Objective 2
Record transactions involving 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 Declaration
No entry required on February 19.
Date of Record
$1 parLearning 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.
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.
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.
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.
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.
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.
The Statement of Retained Earnings is a summary of the activity that occurred in Retained Earnings during the period
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.
Net income - Preferred dividends
Weighted-average common shares outstanding
Learning Objective 9
Compute earnings per share and describe its use.
Market price per common share
Earnings per share
=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.
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.