CORPORATIONS: EARNINGS AND DISTRIBUTIONS CHAPTER TWENTY-THREE CORPORATIONS: EARNINGS AND DISTRIBUTIONS

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

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

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

CLOSING ENTRIES Close revenue accounts to Income Summary Same entry as sole proprietorships and partnerships Close expense accounts to Income Summary 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

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

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

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

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

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

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

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

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

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

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

CASH DIVIDENDS 4,000 shares 10,000 shares x $4 x $2 $16,000 $20,000 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 Common Stock 4,000 shares 10,000 shares x $4 x $2 $16,000 $20,000

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

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: No journal entry!!! 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.

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

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

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

SMALL STOCK DIVIDEND 4,000 x 10% 400 Shares to be distributed 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 Small stock dividends…. DATE DESCRIPTION DEBIT PR CREDIT 1 Mar. 5 Stock Dividends 4,800 2 3 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 5 6 7 8 9 10 11

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

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

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

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

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

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: 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 Just separates it into “Appropriated” and “Unappropriated” Does not affect cash or other assets

APPROPRIATIONS Let’s look at the Journal Entry. 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.

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

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

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

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

Retained Earnings Statement For Year Ended December 31, 20-2 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 Appropriated Retained Earnings is presented first, followed by unapppropriated $700,000 Add net income for the year 280,000 $980,000 Less: Cash dividends $ 30,000 Stock dividends 20,000 Transfer to approp. for treatment plant 200,000 250,000 Ret. Earnings unappropriated, Dec. 31 730,000 Total retained earnings, December 31 $1,130,000

Retained Earnings Statement For Year Ended December 31, 20-2 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 Stock dividends 20,000 Transfer to approp. for treatment plant 200,000 250,000 Ret. Earnings unappropriated, Dec. 31 730,000 Total retained earnings, December 31 $1,130,000 Current year appropriations are shown twice