McGraw-Hill/Irwin
1-1
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
21-1
Chapter
21
Corporate Earnings
and Capital Transactions
Section 1: Accounting
for Corporate Earnings
Section Objectives
1.
2.
3.
4.
Estimate the federal corporate income tax and
prepare related journal entries.
Complete a worksheet for a corporation.
Record corporate adjusting and closing entries.
Prepare an income statement for a corporation.
21-2
Tax Estimates
 Beginning of year: The corporation estimates
the income tax expense for the coming year.


Quarterly: The corporation makes tax deposits
based on the estimated tax expense.

April 15

June 15

September 15

December 15
End of year: The corporation recomputes the
estimated income tax expense and compares it to
the tax deposits made.
21-3
Year-End Adjustment of Tax Liability
 If the quarterly tax deposits are less than the
end-of-year estimated tax expense, record the
difference as follows:
Debit: Income Tax Expense
Credit: Income Tax Payable

If the quarterly tax deposits are greater than the
end-of-year estimated tax expense, record the
difference as follows:
Debit: Income Tax Refund Receivable
Credit: Income Tax Expense
21-4
Reporting Income Tax Expense on
the Income Statement
There are two ways to show income tax expense
on the income statement:
1. As a deduction at the bottom of the income statement.
2. As an operating expense, to emphasize that taxes
represent a cost of doing business.
21-5
Deferred Income Taxes
Income reported on the financial statements does
not usually match taxable income reported on the
tax return.
Tax laws do not always follow generally accepted
accounting principles:

Income or expenses can be included in taxable
income this year and appear on the financial
statements in later years, or vice versa.

Income or expenses can be included on the
financial statements but never appear in taxable
income.
21-6
Closing Entries
1. Close revenue to Income Summary.
2. Close expenses to Income Summary.
3. Close Income Summary (net income or net loss) to
Retained Earnings.
The Retained Earnings account accumulates the
profits and losses of the business
21-7
Objective 4
Prepare an income statement
for a corporation
Extraordinary, Nonrecurring Items
Extraordinary, nonrecurring items are gains or
losses from items that:

are highly unusual,

are clearly unrelated to routine operations, and

do not frequently occur.
They are shown on the income statement in a
separate section titled “Extraordinary Gains and
Losses.”
21-8
Chapter
21
Corporate Earnings and
Capital Transactions
Section 2: Accounting
for Retained Earnings
Section Objectives
5.
6.
7.
8.
Record the declaration and payment of cash
dividends.
Record the declaration and issuance of stock
dividends.
Record stock splits.
Record appropriations of retained earnings.
21-9
Retained Earnings

Does not represent a cash fund.

Are reinvested in:

Inventory

Plant and Equipment

Various other types of assets

May be distributed to stockholders.

Appear in the Stockholders’ Equity section of
the balance sheet.
21-10
To Record Cash Dividends

Declaration Date:
Debit: Retained Earnings
Credit: Dividends Payable (Common or Preferred)

Record Date: A list is made of the stockholders
and the number of shares owned by each.

Payment Date:
Debit: Dividends Payable (Common or Preferred)
Credit: Cash
21-11
Objective 6
Record the declaration and
issuance of stock dividends
Stock Dividend

A stock dividend is a distribution of
corporation’s own stock.

Made on a pro-rata basis.

Results in a conversion of a portion of
retained earnings to permanent capital.

Involves the Common Stock Dividend
Distributable account.
21-12
To Record Stock Dividends

Declaration
Debit: Retained Earnings
Credit: Common Stock Dividend Distributable
Credit: Paid-in Capital in Excess of Par—Common Stock

Distribution
Debit: Common Stock Dividend Distributable
Credit: Common Stock
21-13
Book Value

Represents the total equity applicable to the class of
stock divided by the number of shares outstanding.

Remains the same before and after a stock dividend,
but each shareholder owns more shares of stock
with proportionately lower book value per share.
For each class of stock,
book value per share = equity ÷ shares outstanding
21-14
Objective 7
Record stock splits
Stock Split

Occurs when a corporation issues two or more
shares of new stock to replace each share
outstanding without making changes to the capital
accounts.

Declared when stock is difficult to sell because of
high market price.

Does not change the capital account balances.

Requires only a memorandum notation in the
general journal.
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Objective 8
Record appropriations of
retained earnings
QUESTION:
What is an appropriation of retained
earnings?
ANSWER:
An appropriation of retained earnings is
a formal declaration of an intention to
restrict dividends.
Corporations restrict dividend payments in order
to reinvest in plant assets or working capital
21-16
Chapter
21
Corporate Earnings
and Capital Transactions
Section 3: Other Capital
Transactions and Financial Statements
Section Objectives
9. Record a corporation’s receipt of donated assets.
10. Record treasury stock transactions.
11. Prepare financial statements for a corporation.
21-17
Objective 10
Record treasury stock
transactions
Treasury Stock
Why do corporations purchase their own stock?

The corporation has extra cash.

The corporation offers treasury stock as incentive plans
for officers.

The corporation wants to create a demand for the stock,
thus increasing its market value.

The corporation can purchase shares from the
stockholders who need cash or want to retire (privately
held corporations).
21-18
Prepare financial statements for
Objective 11 a corporation
Financial Statements for a
Corporation
Four financial statements are prepared for
a corporation:

Income statement

Statement of retained earnings

Balance sheet

Statement of cash flows
21-19