LESSON 14-1 4/17/2017 CHAPTER 14 Benchmark 4 The accounting cycle forms the basis for all accounting practices DISTRIBUTING DIVIDENDS AND PREPARING A WORK SHEET FOR A MERCHANDISING BUSINESS *Chapter 6 p. 160 – work sheet

LESSON 14-1 Distributing Corporate Earnings to Stockholders 4/17/2017 LESSON 14-1 Distributing Corporate Earnings to Stockholders retained earnings dividends board of directors declaring a dividend

LESSON 14-1 4/17/2017 Management decisions about future business operations are based on financial information – profit or loss, prepare tax reports Corporation net income can be retained in business or paid to stockholders

STOCKHOLDERS’ EQUITY ACCOUNTS USED BY A CORPORATION LESSON 14-1 4/17/2017 STOCKHOLDERS’ EQUITY ACCOUNTS USED BY A CORPORATION (3000) STOCKHOLDERS’ EQUITY 3110 Capital Stock 3120 Retained Earnings 3130 Dividends 3140 Income Summary Share of stock – unit of ownership in corporation (stockholder) Capital Stock – investment of all owners Retained Earnings – corporation’s earnings, not yet distributed to S/H Dividends – earnings distributed to S/H, temporary account similar to Drawing, DR each time declared

DECLARING A DIVIDEND LESSON 14-1 4/17/2017 Board of directors – group elected by stockholders to manage corporation Declaring a dividend – board decides to distribute corporate earnings Declared on 1 date Paid on a later date Dividend is liability, normal DR balance

DECLARING A DIVIDEND LESSON 14-1 4/17/2017 December 15. Hobby Shack’s board of directors declared a quarterly dividend of $2.00 per share; capital stock issued is 2,500 shares; total dividend, $5,000.00. Date of payment is January 15. Memorandum No. 79. 2 4 3 1 5 6 1. Write the date. 4. Write the debit amount. 2. Write the title of the account debited. 5. Write the title of the account credited. 3. Write the memorandum number. 6. Write the credit amount.

PAYING A DIVIDEND LESSON 14-1 4/17/2017 Hobby Shack issues 1 check for total dividends to be paid – deposited in special dividend checking account, separate check for each stockholder

LESSON 14-1 4/17/2017 PAYING A DIVIDEND January 15. Paid cash for quarterly dividend declared December 15, $5,000.00. Check No. 379. 1 2 3 4 5 1. Write the date. 2. Write the account title. 3. Write the check number. 4. Write the debit account. 5. Write the credit amount.

14-1 Work Together p. 408 LESSON 14-1 4/17/2017

14-1 Work Together p. 408 LESSON 14-1 4/17/2017

Beginning an 8-Column Work Sheet for a Merchandising Business LESSON 14-2 4/17/2017 LESSON 14-2 Beginning an 8-Column Work Sheet for a Merchandising Business

Work Sheet LESSON 14-1 4/17/2017 Information needed to prepare financial statements is summarized Used to plan adjustments Trial balance is entered first, all general ledger accounts and balances entered in same order, even accounts with 0 balances

RECORDING A TRIAL BALANCE ON A WORK SHEET LESSON 14-1 4/17/2017 RECORDING A TRIAL BALANCE ON A WORK SHEET 1 2 1. Account title 2. Account balance 3. Total, prove, and rule the debit and credit columns 3

Planning Adjustments Adjustments needed to bring accounts up to date LESSON 14-1 4/17/2017 Adjustments needed to bring accounts up to date Planned on the worksheet – adjustments columns Balances change when adjusting entries are journalized and posted Adjustments Supplies Prepaid insurance Merchandise inventory Uncollectible accounts expense Depreciation expense Federal income tax expense

Analyzing and recording adjustments LESSON 14-1 4/17/2017 What is the balance? What should be the balance? What must be done to correct the account balance? What adjustment is made?

ANALYZING AND RECORDING SUPPLIES ADJUSTMENTS LESSON 14-1 4/17/2017 ANALYZING AND RECORDING SUPPLIES ADJUSTMENTS Adj. (a) 2,730.00 Supplies Expense—Office Dec. 31 Bal. 3,480.00 Adj. (a) 2,730.00 (Adj Bal. 750.00) Supplies—Office Adj. (b) 2,910.00 Supplies Expense—Store Dec. 31 Bal. 3,944.00 Adj. (b) 2,910.00 (Adj Bal. 1,034.00) Supplies—Store

RECORDING SUPPLIES ADJUSTMENTS ON A WORK SHEET LESSON 14-1 4/17/2017 RECORDING SUPPLIES ADJUSTMENTS ON A WORK SHEET 3 2 1 1. Write the debit amounts in the Adjustments Debit column. 2. Write the credit amounts in the Adjustments Credit column. 3. Label the two parts of the Supplies—Office adjustment with small letter a and small letter b in parentheses.

ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT LESSON 14-1 4/17/2017 ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT 3 1 2 1. Enter the amount of insurance used in the Adjustments Credit column. 2. Enter the same amount in the Adjustments Debit column. 3. Label the two parts of the adjustment with a small letter c in parentheses.

14-2 Work Together LESSON 14-1 4/17/2017

14-2 Work Together LESSON 14-1 4/17/2017

LESSON 14-3 Planning and Recording a Merchandise Inventory Adjustment 4/17/2017 LESSON 14-3 Planning and Recording a Merchandise Inventory Adjustment merchandise inventory – amount of goods on hand for sale to customers Asset Normal debit balance

MERCHANDISE INVENTORY LESSON 14-1 4/17/2017 Amount of merchandise increases each time merchandise is purchased, decreases when merchandise is sold All purchases recorded in purchases account All sales recorded in sales account Adjusted to reflect changes from purchases and sales

MERCHANDISE INVENTORY ADJUSTMENT LESSON 14-1 4/17/2017 Merchandise inventory account adjusted to show current value of merchandise on hand Merchandise Inventory and Income Summary accounts Merchandise Inventory doesn’t have related expense account

ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT LESSON 14-1 4/17/2017 ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT 3 2 1 1. Write the debit amount. 2. Write the credit amount. 3. Label the two parts of this adjustment with a small letter d in parentheses.

Merchandise Inventory LESSON 14-1 4/17/2017 ANALYZING AN ADJUSTMENT WHEN ENDING MERCHANDISE INVENTORY IS GREATER THAN BEGINNING MERCHANDISE INVENTORY Jan. 1 Bal. 294,700.00 Adj. (d) 4,200.00 (New Bal. 298,900.00) Merchandise Inventory Income Summary

14-3 Work Together LESSON 14-1 4/17/2017

14-3 Work Together LESSON 14-1 4/17/2017

LESSON 14-4 4/17/2017 LESSON 14-4 Planning and Recording an Allowance for Uncollectible Accounts Adjustment uncollectible accounts allowance method of recording losses from uncollectible accounts book value book value of accounts receivable

Uncollectible accounts – account receivables that can’t be collected LESSON 14-1 4/17/2017 With each sale on account, business takes a risk that customers won’t pay their accounts Uncollectible accounts – account receivables that can’t be collected At the end of the fiscal year, business doesn’t know which accounts will be uncollectible Business can calculate an estimated amount DR Uncollectible Accounts Expense CR Allowance for Uncollectible Accounts Contra account to Accounts Receivable Book value – difference between asset’s account balance and its related contra account balance

ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS LESSON 14-1 4/17/2017 ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS

ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE LESSON 14-1 4/17/2017 ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE Estimated Uncollectible Accounts Expense = Percentage × Total Sales on Account $1,245.00 1% $124,500.00 Use percentage of total sales on account to estimate uncollectible accounts Use percentage based on previous experience Match expenses with revenue

LESSON 14-1 4/17/2017 ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE 3 1 2 1. Enter the estimated uncollectible amount. 2. Enter the same amount in the Adjustments Debit column. 3. Label the two parts with a small letter e in parentheses.

LESSON 14-1 4/17/2017 ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE Allowance for Uncollectible Accounts Adjustment is added to previous balance New balance is estimated amount that will eventually become uncollectible Accounts Receivable – Allowance for Uncollectible Accounts = Book Value of Accounts Receivable

14-4 Work Together LESSON 14-1 4/17/2017

14-4 Work Together LESSON 14-1 4/17/2017

LESSON 14-5 Planning and Recording Depreciation Adjustments 4/17/2017 LESSON 14-5 Planning and Recording Depreciation Adjustments current assets plant assets depreciation expense estimated salvage value straight-line method of depreciation accumulated depreciation book value of a plant asset

Categories of Assets Most businesses use 2 categories for assets LESSON 14-1 Categories of Assets 4/17/2017 Most businesses use 2 categories for assets Current assets – cash and others that will be used within a year Plant assets – assets used for many years (computer, furniture, cash register) – types: equipment, buildings, land Business buys to use in earning revenue P. 423 3rd paragraph

Depreciating Plant Assets LESSON 14-1 Depreciating Plant Assets 4/17/2017 Match revenue with expenses Cost of plant asset expensed over plant asset’s useful life Portion of cost transferred to expense account each fiscal period – depreciation expense

Factors in calculating depreciation expense LESSON 14-1 Factors in calculating depreciation expense 4/17/2017 Original cost – all costs to make asset usable – price, delivery, installation Estimated salvage value – dispose of asset when no longer usable, amount expected to receive when remove asset (residual or scrap value) Estimated useful life – total amount of depreciation expense distributed over estimated useful life Physical depreciation – wear and tear Functional depreciation – inadequate or obsolete

LESSON 14-1 4/17/2017 CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE – straight-line depreciation (equal amount each year) 1. Subtract the asset’s estimated salvage value from original cost. 2. Divide the estimated total depreciation expense by the years of estimated useful life. Estimated Total Depreciation Expense = Estimated Salvage Value – Original Cost $1,250.00 – $250.00 = $1,000.00 1 Annual Depreciation Expense = Years of Estimated Useful Life ÷ Estimated Total Depreciation Expense $1,000.00 ÷ 5 = $200.00 2

CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE LESSON 14-1 4/17/2017 CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE Accumulated depreciation – total amount of depreciation expense since asset purchased Book value – original cost –accumulated depreciation 2007 Accumulated Depreciation = 2007 Depreciation Expense + 2006 Accumulated Depreciation $400.00 + $200.00 = $600.00 Ending Book Value = Accumulated Depreciation – Original Cost $1,250.00 – $600.00 = $650.00

ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE LESSON 14-1 4/17/2017 ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE Important to retain original cost information for plant assets (don’t credit plant asset account) Record depreciation in Accumulated Depreciation – contra asset account Normal credit balance

ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE LESSON 14-1 4/17/2017 ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE 3 2 1 1. Write the debit amounts. 2. Write the credit amounts. 3. Label the adjustments.

14-5 Work Together LESSON 14-1 4/17/2017

14-5 Work Together LESSON 14-1 4/17/2017

14-5 Work Together LESSON 14-1 4/17/2017

14-5 On Your Own LESSON 14-1 4/17/2017

LESSON 14-6 Calculating Federal Income Tax and Completing a Work Sheet 4/17/2017 LESSON 14-6 Calculating Federal Income Tax and Completing a Work Sheet

Federal Income Tax Adjustment LESSON 14-1 Federal Income Tax Adjustment 4/17/2017 Corporations who expect annual federal income taxes >$500 must pay estimated taxes each quarter Corporation only form of business organization that pays federal income taxes Actual federal tax owed is calculated at end of fiscal year (must file annual return) Additional tax owed note paid in quarterly installments must be paid when final return is filed Federal income tax is an expense – amount depends on net income before tax is recorded

Federal Income Tax Adjustment LESSON 14-1 Federal Income Tax Adjustment 4/17/2017 Before federal income tax can be determined, all adjustments must be completed and all amounts except Federal Income Tax Expense must be extended to the appropriate columns To determine net income before federal income tax expense… Complete all other adjustments Extend all amounts except Federal Income Tax Expense to Income Statement or Balance Sheet columns on separate paper, total work sheet income statement columns Calculate difference between income statement debit column total and income statement credit column total

FEDERAL INCOME TAX EXPENSE ADJUSTMENT LESSON 14-1 4/17/2017 FEDERAL INCOME TAX EXPENSE ADJUSTMENT Total of Income Statement Credit column $ 500,253.10 Less total of Income Statement Debit column before federal income tax –396,049.91 Equals Net Income before Federal Income Tax $ 104,203.19

Federal Income Tax Adjustment LESSON 14-1 Federal Income Tax Adjustment 4/17/2017 Income tax rates increase as amount of net income increases 5 percentages are referred to as tax brackets Different tax percentages are applied to different portions of net income to determine total federal income tax owed

CALCULATING FEDERAL INCOME TAX LESSON 14-1 4/17/2017 p. 428

Hobby Shack estimated $18,000.00 federal income tax for the year LESSON 14-1 4/17/2017 Hobby Shack estimated $18,000.00 federal income tax for the year Paid $4,500 each quarter Calculated $23,889.24 total federal tax based on net income before federal income tax Owe additional $5,889.24 in taxes DR Federal Income Tax Expense CR Federal Income Tax Payable

RECORDING THE FEDERAL INCOME TAX ADJUSTMENT LESSON 14-1 4/17/2017 RECORDING THE FEDERAL INCOME TAX ADJUSTMENT 1 3 2 1. Calculate the amount of federal income tax expense adjustment. 2. Total and rule the Adjustments columns. 3. Extend account balances.

COMPLETING A WORK SHEET LESSON 14-1 COMPLETING A WORK SHEET 4/17/2017 after federal income tax adjustment is recorded, can complete work sheet Net income after federal income tax Cash to dividends – balance sheet Income summary to federal income tax expense – income statement 1 3 2 4 5 1. Total the Income Statement and Balance Sheet columns. 2. Calculate and enter the net income after federal income tax. 3. Extend the net income amount. 4. Calculate the column totals. 5. Rule double lines.

A COMPLETED 8-COLUMN WORK SHEET LESSON 14-1 4/17/2017 A COMPLETED 8-COLUMN WORK SHEET

A 10-COLUMN WORK SHEET 1 2 3 5 4 6 1. Trial balance 5. Extend balances LESSON 14-1 4/17/2017 1 2 3 5 4 6 1. Trial balance 5. Extend balances 2. Adjustments 6. Calculate net income; total, prove and rule 3. Extend adjusted balances 4. Total, prove, and rule

14-6 Work Together LESSON 14-1 4/17/2017

14-6 Work Together LESSON 14-1 4/17/2017

14-2-6 On Your Own LESSON 14-1 4/17/2017

Adjusting Entries Supplies DR Supplies Expense CR Supplies Insurance LESSON 14-1 Adjusting Entries 4/17/2017 Supplies DR Supplies Expense CR Supplies Insurance DR Insurance Expense CR Prepaid Insurance Merchandise Inventory Ending inventory higher DR Merchandise Inventory CR Income Summary Ending inventory lower DR Income Summary CR Merchandise Inventory

Adjusting Entries Uncollectible Accounts LESSON 14-1 Adjusting Entries 4/17/2017 Uncollectible Accounts DR Uncollectible Accounts Expense CR Allowance for Uncollectible Accounts Depreciation DR Depreciation Expense CR Accumulated Depreciation Federal Income Tax DR Federal Income Tax Expense CR Federal Income Tax Payable