1. Distributing Dividends & Preparing Work Sheet
Chapter 14
Distributing Dividends &
Preparing Work Sheet

2. Stockholder’s Equity 3110 Capital Stock 3120 Retained Earnings
3130 Dividends
3140 Income Summary

3. Retained Earnings
Amount earned by a corporation and not yet distributed to stockholders
Used to record a corporations earnings

4. Dividends Earnings distributed to stockholders
Income given to stockholders as a return on their investment
Similar to drawing acct
Dividends are “declared” and then later “distributed”

5. Declaring a Dividend
December 15 – Hobby Shack declare a quarterly dividend of $2.00 per share; capital stock issued is 2,500 shares; total dividend $5,000
A group of persons elected by stockholders to manage corporation is board of directors
The board distribute corporate earnings to stockholders by declaring a dividend
Declared on one date
Paid on a later date

6. Paying a Dividend
January 15 – Paid cash for quarterly dividend declared on Dec 15, $5,000.
Check is issued into a special dividend checking account
Separate check for each stockholder is drawn from this account

7. Work Sheet Trial Balance Adjustments
All general ledger accounts and balances
Adjustments
Supplies
Prepaid insurance
Merchandise inventory
Uncollectible accounts expense
Depreciation expense
Federal income tax expense

8. Merchandise Inventory
Amount of goods on hand for sale to customers is merchandise inventory
Changes resulting from purchasing and sales transactions are NOT recorded here
Merchandise inventory must be adjusted to reflect changes
Can be an INCREASE or a DECREASE
(use Income Summary to adjust)

9. Allowance for Uncollectible Account Adjustment
Accounts receivable that cannot be collected are called uncollectible accounts
Risk of doing business
Recorded as an expense
Business does not know which customer accounts will become uncollectible

10. Allowance for Uncollectible Account Adjustment
To record estimated uncollectible accounts, adjustment made to two accounts
Dr to Uncollectible accounts expense
Cr to Allowance for uncollectible accounts
Contra account to Accounts receivable
Crediting the estimated value of uncollectable accounts to a contra account is called allowance method of recording losses

11. Estimating Uncollectible Accts Expense
Businesses use a percentage of total sales on account
Each is a risk of loss
Hobby Shack uses estimated 1% of total sales on account

12. Depreciation Adjustments
Current Assets
Cash and other assets expected to be consumed within a year
Plant Assets
Assets used for number of years in operation of business
Equipment, buildings, land

13. Depreciating Plant Assets
Business buys plant assets to use in earning revenue
Each will only be useful for a limited time period
To match revenue with expenses the cost of plant asset should be expensed over the asset’s useful life
Portion of asset’s cost transferred to expense account each fiscal period that asset is used to earn revenue
Depreciation Expense

14. Calculating Depreciation
Original Cost
includes costs paid to make asset usable
Estimated Salvage Value
amount received for asset at time of disposal
Estimated Useful Life
Amount of time asset will be useful
Physical depreciation
Functional depreciation

15. Calculating Depreciation
Straight Line Depreciation
Charging equal amount of depreciation expense for a plant asset each year of useful life

16. Calculating Depreciation
Accumulated Depreciation
Total amount of depreciation expense recorded since purchase of plant asset
Book Value
Original cost of asset minus accumulated depreciation

17. Federal Income Tax Expense Adjustment
Estimated income tax is paid quarterly
April, june, september, december
Actual federal income tax owed calculated at end of fiscal year
Corporation must file annual return
Any additional tax owed that was not paid quarterly must be paid in full

18. Federal Income Tax Expense Adjustment
Hobby Shack estimated $18,000 in federal income tax for year
Paid $4,500 each quarter (= $18,000)
Each payment is recorded as:
DR to Federal Income Tax Expense
CR to Cash
However….
The amount of tax depends on NET INCOME before the tax is recorded

19. Calculating Net Income Before
Complete ALL OTHER ADJUSTMENTS
Extend all amounts (IS & BS columns) EXCEPT Federal Income Tax Expense
On separate paper – total Income Statement Debit & Credit columns
Calculate difference (Cr – Dr)
That is “NET INCOME BEFORE TAXES”

20. Calculating Federal Income Tax

21. Recording Fed Inc Tax Exp Adjustment
After calculating amount of federal income tax expense
Adjustment is difference between federal income tax for year and taxes paid
Trial balance (-) calculation
Adjustment affects:
Federal Income Tax Expense
Federal Income Tax Payable

22. Completing the Work Sheet
AFTER adjustment for federal income tax expense is recorded – can now complete worksheet
Income statement column totals new used to calculate NET INCOME AFTER TAX