Heintz & Parry
Chapter
20thth Edition
21
Corporations:
Corporations: Taxes,
Taxes,
Earnings,
Earnings, Distributions,
Distributions,
and
and the
the Retained
Retained
Earnings
Earnings Statement
Statement
College
College Accounting
Accounting
CORPORATE INCOME TAXES
1
• A disadvantage of corporations is that
they must pay income taxes
• Corporations estimate their annual income
and make quarterly payments
Account for corporate
income taxes.
• At the end of accounting period, the actual
amount of income tax is determined
– If it differs from estimates, an adjusting
entry is made
GENERAL JOURNAL
DATE
DESCRIPTION
PR DEBIT CREDIT
1
2
3
4
5
6
7
DATE
1
2
3
4
EXAMPLE:
If the corporation estimates its income
taxes for 20-1 will be $160,000…
8
9
10
11
GENERAL JOURNAL
5
6
7
8
9
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10
11
DESCRIPTION
Income Tax Expense
PR DEBIT CREDIT
40,000
Cash
…quarterly payments will be made
on April 15, June 15, September 15,
and December 15.
($160,000 ÷ 4 = $40,000)
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40,000
GENERAL JOURNAL
DATE
1
2
3
4
DESCRIPTION
GENERAL JOURNAL
PR DEBIT CREDIT
Income Tax Expense
40,000
Cash
40,000
The same entry is
made each quarter.
5
6
DATE
1
2
3
4
5
6
7
7
8
9
8
9
10
11
10
11
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DESCRIPTION
PR DEBIT CREDIT
Income Tax Expense
Income Tax Payable
3,000
3,000
At the end of the year, actual income
taxes are calculated as $163,000,
or $3,000 more than estimated.
An adjusting entry is needed.
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GENERAL JOURNAL
DATE
1
2
3
DESCRIPTION
Income Tax Payable
Cash
PR DEBIT CREDIT
3,000
3,000
4
5
6
2
An additional $3,000 is paid when a tax
return is filed in the following period.
Explain the use of the
retained earnings account.
7
8
9
10
11
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THE RETAINED EARNINGS ACCOUNT
Retained Earnings
THE RETAINED EARNINGS ACCOUNT
Retained Earnings
Net income
Very few transactions
affect the retained
earnings account.
Usually the only
credit is for net income.
THE RETAINED EARNINGS ACCOUNT
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 on
10,000 shares of common stock. Both dividends are
payable on February 20 to stockholders of record on
February 10.
Retained Earnings
Net loss Net income
Dividends
(closing)
DATE OF RECORD:
Appropriations
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.
There are only three
types of debits.
SMALL STOCK DIVIDEND
APPROPRIATIONS
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 threeyear period.
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
× 10%
400 shares to be distributed
Let’s look at
the journal entry.
GENERAL JOURNAL
CLOSING ENTRIES
1. Close revenue accounts to Income Summary
– The same entry as sole proprietorships and
partnerships
2. Close expense accounts to Income Summary
– The same entry as sole proprietorships and
partnerships
3. Close Income Summary to Retained Earnings
– Credit balance in Income Summary = net
income
– Debit balance in Income Summary = net loss
4. Close Dividends to Retained Earnings
DATE
1
2
3
4
DESCRIPTION
Income Summary
PR DEBIT CREDIT
337,000
Retained Earnings
5
6
7
8
9
10
11
Closing Entry #3 EXAMPLE:
The corporation has net income
of $337,000 for the period.
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337,000
GENERAL JOURNAL
DATE
1
2
3
4
DESCRIPTION
GENERAL JOURNAL
PR DEBIT CREDIT
Retained Earnings
52,000
Income Summary
52,000
5
6
7
DESCRIPTION
PR DEBIT CREDIT
Retained Earnings
30,000
Dividends
30,000
5
What if the corporation
has a net loss of $52,000?
8
9
10
11
DATE
1
2
3
4
6
7
8
9
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10
11
Closing Entry #4 EXAMPLE:
The corporation declares
$30,000 in dividends.
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CASH DIVIDENDS
3
• A distribution of corporate assets (cash) to
stockholders
• To be issued if corporation has:
– Unrestricted retained earnings
– An adequate cash balance
– Declared a cash dividend
Account for dividends and
stock splits.
• Only the board of directors can declare a dividend
• Three key dates:
– Date of declaration
– Date of record
– Date of payment
GENERAL JOURNAL
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 on
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
4,000 shares
× $4
$16,000
Common Stock
10,000 shares
×
$2
$20,000
1
2
3
4
5
DATE
DESCRIPTION
20-Feb. 1 Cash Dividends
PR DEBIT CREDIT
16,000
Preferred Dividends Payable
1 Cash Dividends
Common Dividends Payable
16,000
20,000
6
7
8
9
10
11
Separate entries are made
for each type of stock.
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20,000
GENERAL JOURNAL
1
2
3
4
DATE
DESCRIPTION
20-Feb. 20 Preferred Dividends Payable
GENERAL JOURNAL
PR DEBIT CREDIT
Cash
20 Common Dividends Payable
Cash
5
16,000
20,000
5
20,000
6
DATE
DESCRIPTION
Cash Dividends
4
Dividends Payable
10
11
PR DEBIT CREDIT
xxx
xxx
xxx
Cash
xxx
6
xxx
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DATE
DESCRIPTION
1
2
3
Cash Dividends
4
Dividends Payable
PR DEBIT CREDIT
xxx
Dividends Payable
5
xxx
xxx
Cash
xxx
6
7
7
Total assets
decrease
8
9
How do cash dividend entries affect
paid-in capital?
8
9
10
10
11
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GENERAL JOURNAL
DATE
DESCRIPTION
Cash Dividends
GENERAL JOURNAL
PR DEBIT CREDIT
Dividends Payable
Cash
DATE
xxx
1
2
3
4
xxx
5
xxx
Dividends Payable
xxx
6
DESCRIPTION
Cash Dividends
PR DEBIT CREDIT
xxx
Dividends Payable
Dividends Payable
Cash
xxx
xxx
6
7
10
11
xxx
GENERAL JOURNAL
Dividends Payable
5
8
9
xxx
How do cash
dividend entries affect
total assets?
8
9
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1
2
3
5
xxx
Dividends Payable
Cash
GENERAL JOURNAL
1
2
3
4
PR DEBIT CREDIT
Dividends Payable
7
Date of Payment
8
9
11
DESCRIPTION
Cash Dividends
6
7
10
11
DATE
1
2
3
4
16,000
7
No effect
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8
9
10
11
How do cash dividend entries affect
retained earnings?
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xxx
GENERAL JOURNAL
DATE
1
2
3
4
5
DESCRIPTION
STOCK DIVIDENDS
PR DEBIT CREDIT
Cash Dividends
• A proportionate distribution of shares of a
corporation’s own stock to its stockholders
• Several reasons for this type of dividend:
– The company may be short of cash
– The company may want to increase the
marketability of its shares by lowering
the price per share
– The corporation may want to transfer a
portion of retained earnings to a paid-in
capital category to indicate that it is
unavailable for dividends
xxx
Dividends Payable
xxx
Dividends Payable
Cash
xxx
xxx
6
7
8
9
10
11
Decrease (remember the Cash
Dividends account
is closed to Retained Earnings).
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STOCK DIVIDENDS
SMALL STOCK DIVIDEND
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.
• Typically stated as a percentage of common
stock outstanding
• The date of declaration journal entry varies
depending on the dividend percentage
– Dividends for less than 20–25% (small)
• Stock Dividend is debited for the market value of the
stock
– Dividends for more than 20–25% (large)
• Stock Dividend is debited for the par or stated value
of the stock
4,000
× 10%
400 shares to be distributed
GENERAL JOURNAL
1
2
3
4
5
6
7
DATE
DESCRIPTION
20-Mar. 5 Stock Dividends
GENERAL JOURNAL
PR DEBIT CREDIT
4,800
Small stock dividends:
The stock dividend account is debited
for the market value of the shares
to be distributed.
(400 shares × $12 market value)
8
9
10
11
1
2
3
4
5
6
7
DATE
DESCRIPTION
20-Mar. 5 Stock Dividends
PR DEBIT CREDIT
4,800
Stock Div. Distributable
Stock Dividends Distributable
is credited for the par value.
(400 shares × $5 par value)
8
9
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10
11
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2,000
GENERAL JOURNAL
1
2
3
4
5
6
7
8
9
10
11
DATE
DESCRIPTION
20-Mar. 5 Stock Dividends
GENERAL JOURNAL
PR DEBIT CREDIT
4,800
Stock Div. Distributable
Paid-In Capital in Excess
of Par—Common Stock
2,000
2,800
1
2
3
4
DATE
DESCRIPTION
20-Mar. 5 Stock Dividends
6
27 Stock Div. Distributable
7
Common Stock
8
9
10
11
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8
9
PR DEBIT CREDIT
xxx
xxx
xxx
DATE
1
2
3
Stock Dividends
4
8
9
11
7
8
9
10
11
xxx
Stock Div. Distributable
xxx
Paid-In Capital in Excess
of Par—Common Stock
xxx
xxx
xxx
How do small stock
dividend entries affect the assets?
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GENERAL JOURNAL
PR DEBIT CREDIT
xxx
Stock Div. Distributable
Paid-In Capital in Excess
of Par—Common Stock
xxx
xxx
5
6
PR DEBIT CREDIT
6
Stock Div. Distributable
At
distribution
7
Common Stock
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DESCRIPTION
DESCRIPTION
Stock Dividends
10
DATE
2,000
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GENERAL JOURNAL
1
2
3
4
2,000
5
10
11
2,800
GENERAL JOURNAL
Distribution of
stock dividend (small)
to stockholders
7
2,000
The new shares of stock are
distributed to stockholders on March 27.
GENERAL JOURNAL
6
4,800
Stock Div. Distributable
Paid-In Capital in Excess
of Par—Common Stock
5
The Stock Dividends Distributable account
is credited for the par value and reported as an
addition to common stock on the balance sheet.
The Paid-in Capital in Excess of Par account
is credited for the difference between
market value and par value.
DATE
DESCRIPTION
1
Stock Dividends
At
2
declaration
Stock Div. Distributable
3
Paid-In Capital in Excess
4
of Par—Common Stock
5
PR DEBIT CREDIT
DATE
1
2
3
4
DESCRIPTION
PR DEBIT CREDIT
Stock Dividends
xxx
Stock Div. Distributable
Paid-In Capital in Excess
of Par—Common Stock
xxx
xxx
5
Stock Div. Distributable
Common Stock
6
xxx
No effect
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xxx
7
8
9
10
11
Stock Div. Distributable
Common Stock
xxx
How do small stock dividend entries
affect total paid-in capital?
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xxx
GENERAL JOURNAL
DATE
1
2
3
4
DESCRIPTION
GENERAL JOURNAL
PR DEBIT CREDIT
Stock Dividends
xxx
Stock Div. Distributable
Paid-In Capital in Excess
of Par—Common Stock
xxx
xxx
5
Stock Div. Distributable
Common Stock
7
8
9
6
xxx
xxx
10
11
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7
8
9
10
11
DESCRIPTION
PR DEBIT CREDIT
Stock Dividends
xxx
Paid-In Capital in Excess
of Par—Common Stock
xxx
Stock Div. Distributable
Common Stock
7
xxx
xxx
Retained earnings is decreased by
market value (remember Stock Dividends
are closed to Retained Earnings).
xxx
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GENERAL JOURNAL
PR DEBIT CREDIT
xxx
Distribution of
stock dividend (large)
to stockholders
8
9
10
11
xxx
• Recorded similarly to the small stock
dividend, except:
– The stock dividend account is debited
for the par value instead of the market
value
– Stock dividends distributable are
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
xxx
Stock Div. Distributable
DATE
DESCRIPTION
1
Stock Dividends
At
2
declaration
Stock Div. Distributable
3
4
6
xxx
How do small stock dividend entries
affect retained earnings?
GENERAL JOURNAL
5
xxx
LARGE STOCK DIVIDEND
5
6
xxx
Stock Div. Distributable
Common Stock
7
8
9
Total paid-in capital is
increased by market value.
DATE
4
PR DEBIT CREDIT
Stock Div. Distributable
Paid-In Capital in Excess
of Par—Common Stock
GENERAL JOURNAL
1
2
3
DESCRIPTION
Stock Dividends
5
6
10
11
DATE
1
2
3
4
xxx
DATE
1
2
3
4
PR DEBIT CREDIT
Stock Dividends
xxx
Stock Div. Distributable
Stock Div. Distributable
At
distribution
5
Common Stock
xxx
xxx
6
7
8
9
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DESCRIPTION
10
11
How do large stock
dividend entries affect the assets?
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xxx
GENERAL JOURNAL
DATE
1
2
3
4
DESCRIPTION
GENERAL JOURNAL
PR DEBIT CREDIT
Stock Dividends
Stock Div. Distributable
Stock Div. Distributable
Common Stock
5
xxx
xxx
5
xxx
6
DATE
DESCRIPTION
Stock Dividends
4
Stock Div. Distributable
10
11
PR DEBIT CREDIT
xxx
xxx
xxx
Common Stock
xxx
6
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DATE
DESCRIPTION
1
2
3
Stock Dividends
4
Stock Div. Distributable
5
7
Increase by
par value
8
9
8
9
10
PR DEBIT CREDIT
xxx
Stock Div. Distributable
xxx
xxx
Common Stock
How do large stock dividend entries
affect retained earnings?
10
11
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GENERAL JOURNAL
DATE
DESCRIPTION
Stock Dividends
PR DEBIT CREDIT
xxx
Stock Div. Distributable
Stock Div. Distributable
Common Stock
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STOCK SPLITS
xxx
xxx
6
10
11
xxx
6
7
8
9
xxx
GENERAL JOURNAL
Stock Div. Distributable
5
7
xxx
How do large stock dividend entries
affect paid-in capital?
8
9
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1
2
3
5
xxx
Stock Div. Distributable
Common Stock
GENERAL JOURNAL
1
2
3
4
PR DEBIT CREDIT
Stock Div. Distributable
7
No effect
8
9
11
DESCRIPTION
Stock Dividends
6
7
10
11
DATE
1
2
3
4
xxx
Decrease
by par value
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xxx
• The exchange of 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
xxx
GENERAL JOURNAL
DATE
1
2
3
4
5
6
7
DESCRIPTION
PR DEBIT CREDIT
Memo notation
No journal entry; just
a memo in the journal
Stock split:
The exchange of old stock for
multiple shares of new stock
8
9
10
11
GENERAL JOURNAL
DATE
1
2
3
4
DESCRIPTION
PR DEBIT CREDIT
Memo notation
Because there is no
entry, there is no effect on
assets, paid-in capital, or
retained earnings.
5
6
7
8
9
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10
11
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APPROPRIATIONS
4
• 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
Account for appropriations
of retained earnings.
• Does not affect total retained earnings
– Just separates it into “appropriated” and
“unappropriated”
• Does not affect cash or other assets
GENERAL JOURNAL
APPROPRIATIONS
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 threeyear period.
Let’s look at
the journal entry.
DATE
1
2
3
4
DESCRIPTION
Retained Earnings
PR DEBIT CREDIT
200,000
Retained Earnings Approp.
for Treatment Plant
5
6
7
8
9
10
11
$600,000 ÷ 3 years
The same entry is made at the
end of each of the three years.
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200,000
GENERAL JOURNAL
Retained Earnings Section of the Balance Sheet
Retained earnings:
Appropriated for treatment plant
Unappropriated
Total retained earnings
$200,000
700,000
DATE
$900,000
1
2
3
4
5
6
7
DESCRIPTION
PR DEBIT CREDIT
Retained Earnings Approp.
for Treatment Plant
600,000
Retained Earnings
600,000
After the treatment plant
is completed, the appropriation
is no longer needed.
8
9
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5
Prepare a retained earnings
statement.
10
11
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Sample
Sample Corporation
Corporation Retained
Retained Earnings
Earnings Statement
Statement
For
For Year
Year Ended
Ended December
December 31,
31, 20-20-Retained earnings, January 1
Add net income for the year
$1,100,000
280,000
$1,380,000
$30,000
20,000
Less: Cash dividends
Stock dividends
Retained earnings, December 31
50,000
$1,330,000
Similar to the
statement of owner’s equity
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Chem
Chem Corporation
Corporation Retained
Retained Earnings
Earnings Statement
Statement
For
For Year
Year Ended
Ended December
December 31,
31, 20-2
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
$1,130,000
Total retained earnings, December 31
Appropriated retained earnings
are presented first, followed by
unappropriated.
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Chem
Chem Corporation
Corporation Retained
Retained Earnings
Earnings Statement
Statement
For
For Year
Year Ended
Ended December
December 31,
31, 20-2
20-2
Appropriated:
Appropriated for treatment plant, Jan. 1
Current year appropriation (see below)
Retained earnings appropriated, Dec. 31
Unappropriated:
Balance, January 1
Add net income for the year
Less: Cash dividends
Stock dividends
Trans. to approp. for treatment plant
Ret. earnings unappropriated, Dec. 31
Total retained earnings, December 31
$200,000
200,000
$ 400,000
$700,000
280,000 $980,000
$ 30,000
20,000
200,000 250,000
730,000
$1,130,000
Current year appropriations are shown twice.
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