LESSON 14-1
Distributing Corporate Earnings to
Stockholders
New Vocabulary
Retained earnings: An amount earned by a
corporation and not yet distributed to
stockholders
Dividends: Earnings distributed to stockholders
Board of directors: A group of people elected
by the stockholders to manage a corporation
Declaring a dividend: Action by a Board of
Directors to distribute corporate earnings to
stockholders
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STOCKHOLDERS’ EQUITY ACCOUNTS page 405
USED BY A CORPORATION
3110
3120
3130
3140
(3000) STOCKHOLDERS’ EQUITY
Capital Stock
Retained Earnings
Dividends
Income Summary
Earnings not yet
distributed
Investment of all
owners
3
DECLARING A DIVIDEND
page 406
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.
4
PAYING A DIVIDEND
page 407
January 15. Paid cash for quarterly dividend declared December
15, $5,000.00. Check No. 379.
5
Audit Your Understanding
Under what major chart of accounts division
are the owners’ equity accounts for a
corporation normally listed?
Stockholders’ equity (300)
How many accounts are kept for the
investment of all owners of the Corporation?
One account called Capital Stock
6
Audit Your Understanding
What account does a corporation use to
record earnings not yet distributed to
stockholders?
Retained Earnings
What action is required before a
corporation can distribute income to its
stockholders?
The Board of Directors declares a
dividend
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14-2 RECORDING A TRIAL
BALANCE ON A WORK SHEET
page 410
1. Account title1
2. Account balance
3. Total, prove,
and rule the
debit and
credit columns
2
3
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RECORDING SUPPLIES
page 412
ADJUSTMENTS ON A WORK SHEET
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ANALYZING AND RECORDING A page 413
PREPAID INSURANCE ADJUSTMENT
1. Enter the amount of insurance
used in the Adjustments Credit
column.
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Audit Your Understanding
What accounts are used for the
adjustment to office supplies?
Supplies—office and Supplies Expense—
Office
What accounts are used for the
adjustment to prepaid insurance?
Prepaid Insurance and Insurance
Expense
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14-3 New Vocabulary
Merchandise inventory:
The amount of goods
on hand for sale to
customers
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MERCHANDISE INVENTORY
page 415
15
ANALYZING AND RECORDING A
MERCHANDISE INVENTORY ADJUSTMENT
page 416
16
Audit Your Understanding
What accounts are used for the
adjustment for merchandise inventory?
Merchandise Inventory and Income
Summary
17
Audit Your Understanding
What adjusting entry is entered on a worksheet
when the ending merchandise inventory is
less than the beginning value?
Debit Income Summary and credit
Merchandise Inventory
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LESSON 14-4
Planning and Recording an Allowance for
Uncollectible Accounts Adjustment
New Vocabulary
Uncollectible Accounts: Accounts Receivable that
cannot be collected
Allowance method of recording losses from
uncollectible accounts: Crediting the estimated value
of uncollectible accounts to a contra account
Book value: The difference between an asset’s
account balance and its related contra account
balance
Book value of Accounts Receivable: The difference
between the balance of Accounts Receivable and its
contra account, Allowance for Uncollectible Accounts
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ALLOWANCE METHOD OF RECORDING
page 419
LOSSES FROM UNCOLLECTIBLE ACCOUNTS
This is a contra
account for
accounts
receivable.
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ESTIMATING UNCOLLECTIBLE
ACCOUNTS EXPENSE
page 420
Total Sales
on Account
× Percentage =
$124,500.00 ×
1%
=
Estimated
Uncollectible
Accounts
Expense
$1,245.00
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ANALYZING AND RECORDING AN
ADJUSTMENT FOR UNCOLLECTIBLE
ACCOUNTS EXPENSE
page 421
1
2
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Audit Your Understanding
Why is an uncollectible accounts recorded as an
expense rather than as a reduction in revenue?
Loss is considered a regular expense of doing
business. Revenue was earned when the sale
was made. Failing to collect an account does
not cancel the sale.
When do businesses normally estimate the
amount of their uncollectible accounts expense?
At the end of the fiscal period
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Audit Your Understanding
What two objectives will be accomplished by
recording an estimated amount of
uncollectible accounts expense?
(1) Report a balance sheet amount for
Accounts Receivable that reflects the
amount the business expects to collect
in the future.
(2) Recognize the expense of uncollectible
accounts in the same period in which the
related revenue is recorded.
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Audit Your Understanding
Why is Allowance for Uncollectible
Accounts called a contra account?
It reduces its related asset account,
Accounts Receivable
How is the book value of Accounts
Receivable calculated?
The difference between the balance of
Accounts Receivable and its contra
account, Allowance for Uncollectible
Accounts
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LESSON 14-5
Planning and Recording
Depreciation Adjustments
New Vocabulary
Current assets: Cash and other assets expected to be
exchanged for cash or consumed within a year
Plant assets: Assets that will be used for a number of
years in the operation of the business
Depreciation expense: the portion of a plant asset’s
cost that is transferred to an expense account in
each fiscal period during a plant asset’s useful life
Estimated salvage value: the amount an owner
expects to receive when a plant asset is removed
from use
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New Vocabulary
Straight-line method of depreciation:
Charging an equal amount of depreciation
expense for a plant asset in each year of
useful life
Accumulated depreciation: The full amount of
depreciation expense that has been recorded
since the purchase of a plant asset
Book value of a plant asset: the original cost
of a plant assets minus accumulated
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depreciation
(continued on next slide)
CALCULATING DEPRECIATION
EXPENSE AND BOOK VALUE
page 424
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.
Original
Cost
$1,250.00
Estimated
Estimated
Total
– Salvage =
Depreciation
Value
Expense
–
Estimated Total
Depreciation ÷
Expense
$1,000.00
÷
$250.00 =
Years of
Estimated
Useful Life
5
=
=
$1,000.00 1
Annual
Depreciation
Expense
$200.00 2 32
CALCULATING DEPRECIATION
EXPENSE AND BOOK VALUE
page 424
(continued from previous slide)
20X2
Accumulated
Depreciation
$400.00
20X3
+ Depreciation =
Expense
+
Original Cost –
$1,250.00
–
$200.00
20X3
Accumulated
Depreciation
=
$600.00
Accumulated
Depreciation
=
Ending
Book Value
$600.00
=
$650.00
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ANALYZING AND RECORDING ADJUSTMENTS
page 425
FOR DEPRECIATION EXPENSE
34
Audit Your Understanding
What are the two categories of assets?
Current assets and plant assets
What three factors are used to calculate a
plant asset’s annual depreciation
expense?
Original cost, estimated salvage value,
and estimated useful life
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14-6 Calculating Federal Income
Tax and Completing a Worksheet
Federal income tax expense
adjustment
Total of income statement
credit column
Less total of income
statement debit column
before federal income tax
Equals net income before
Federal Income Tax
500,253.10
-396,049,91
104,203.19
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Calculating Federal Income Tax
Page 428
(Example: 104,203.19)
15% of net income before taxes, $0 to
$50,000 (.15 x first 50,000)
Plus 25% of net income before taxes,
$50,000 to $75,000 (.25 x next 25,000)
Plus 34% of net income before taxes,
$75,000 to $100,000 (.34 of next 25,000)
Plus 39% of income before taxes, $100,000
to $335,000 (.39 x up to next 235,000)
Plus 34% of net income before taxes over
$335,000 (.34 x the rest of the income)
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Record the Federal Income Tax
Adjustment
Calculate the amount of federal income tax expense
adjustment.
Once you know the yearly fed tax, enter it in the Income
Statement Debit Column. **So Important: The adjustment
is the difference between the federal income tax for the year
and the taxes already paid during the year.
Enter the same amount in the adjustments debit
column of the federal income tax expense line on the
worksheet
Enter the federal income tax expense adjustment in
the adjustments column on the federal income tax
payable line of the worksheet
Then extend the balance to the Balance Sheet Credit
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column
Finishing the Adjustments Column
Total and rule the Adjustments column
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Completing a Worksheet
Total the income statement and
balance sheet columns
Calculate and enter the net income
after federal income tax
Extend the net income amount
Calculate the column totals
Draw double lines
41
Audit Your Understanding
In what column is the income summary amount extended?
It Depends on the Merchandise Inventory Balance: The
Income Statement debit or credit column
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1% Error Rate…
200,000 incorrect prescriptions
30,000 babies accidentally dropped by
doctors and nurses
4 days a year of contaminated water
No electricity or heat for 15 minutes
each day
Newspapers not delivered 4 times a
year
2 short or long landings by airliners
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Dream Car?
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