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

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

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

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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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.

19. 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

20. 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

21. 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 % (Small)
Stock Dividend account is debited for the Market Value of the stock
Dividends more than % (Large)
Stock Dividend account is debited for the Par or Stated Value of the stock

22. 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

23. 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

24. 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

25. 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

26. GENERAL JOURNAL Date of Distribution DATE DESCRIPTION DEBIT PR CREDIT1
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

27. 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

28. 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.

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx2
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

41. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx2
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

42. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx2
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

43. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx2
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

44. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx2
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

45. 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

46. 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

47. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx2
Stock Div. Distributable
xxx 3 4
Stock Div. Distributable
xxx 5
Common Stock
xxx
No Effect 6 7 8 9 10 11

48. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx2
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

49. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx2
Stock Div. Distributable
xxx 3 4
Stock Div. Distributable
xxx 5
Common Stock
xxx
Increase by
par value 6 7 8 9 10 11

50. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx2
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

51. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Stock Dividends xxx2
Stock Div. Distributable
xxx 3 4
Stock Div. Distributable
xxx 5
Common Stock
xxx
Decrease by
par value 6 7 8 9 10 11

52. 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

53. 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

54. 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

55. 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.

56. 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

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

58. 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

59. 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

60. 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

61. 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