Distributing Dividends and Preparing a Worksheet for
a Merchandising Business
STOCKHOLDERS’ EQUITY ACCOUNTS
USED BY A CORPORATION
page 405
3110
3120
3130
3140
2
(3000) STOCKHOLDERS’ EQUITY
Capital Stock
Retained Earnings
Dividends
Income Summary
LESSON 14-1
6. Stockholders’ Equity and Dividends
Retained earnings – an amount earned by a corporation
and not yet distributed to stockholders
Dividends – earnings distributed to stockholders
(temporary account similar to drawing account for a sole proprietorship)
Board of Directors – a group of persons elected by the
stockholders to manage a corporation
Declaring a dividend – action by the board of directors to
distribute corporate earnings to stockholders
(usually declared one date and paid on a later date)
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.
2
4
3
1
5
1. Write the date.
2. Write the title of the account
debited.
3. Write the memorandum number.
4
LESSON 14-1
6
4. Write the debit amount.
5. Write the title of the account
credited.
6. Write the credit amount.
PAYING A DIVIDEND
page 407
January 15. Paid cash for quarterly dividend declared December
15, $5,000.00. Check No. 379.
1
1.
2.
3.
4.
5.
5
2
3
Write the date.
Write the account title.
Write the check number.
Write the debit account.
Write the credit amount.
LESSON 14-1
4
5
RECORDING A TRIAL BALANCE ON A
WORK SHEET
page 410
1
1. Account title
2. Account balance
3. Total, prove, and
rule the debit and
credit columns
2
3
6
LESSON 14-2
ANALYZING AND RECORDING
SUPPLIES ADJUSTMENTS
Adj. (a)
Dec. 31 Bal.
(Adj Bal.
Adj. (b)
Dec. 31 Bal.
(Adj Bal.
7
Supplies Expense—Office
2,730.00
Supplies—Office
3,480.00 Adj. (a)
750.00)
2,730.00
Supplies Expense—Store
2,910.00
Supplies—Store
3,944.00 Adj. (b)
1,034.00)
LESSON 14-2
2,910.00
page 411
RECORDING SUPPLIES
ADJUSTMENTS ON A WORK SHEET
page 412
3
2
3
1
1. Write the debit amounts in the Adjustments Debit column.
2. Write the credit amounts in the Adjustments Credit column.
3. Label the two parts of the Supplies—Office adjustment with small letter
a and small letter b in parentheses.
8
LESSON 14-2
ANALYZING AND RECORDING A
PREPAID INSURANCE ADJUSTMENT
page 413
3
1
3
2
1. Enter the amount of insurance used
in the Adjustments Credit column.
2. Enter the same amount in the
Adjustments Debit column.
3. Label the two parts of the
adjustment with a small letter c in
parentheses.
9
LESSON 14-2
7. Planning and Adjusting Merchandise Inventory
Merchandise Inventory (asset) – the amount of goods on
hand for sale to customers
- Purchases of merchandise are recorded to purchases account
- Sales of merchandise are recorded to sales account
(changes to merchandise happen so often that the merchandise inventory
account is only affected once per fiscal period, when doing the worksheet)
10
page 416
ANALYZING AND RECORDING A MERCHANDISE INVENTORY
ADJUSTMENT
3
2
3
1
No direct temporary account (expense) so
Income Summary is used for the adjustment
1. Write the debit amount.
2. Write the credit amount.
3. Label the two parts of this
adjustment with a small letter d
in parentheses.
11
LESSON 14-3
ANALYZING AN ADJUSTMENT WHEN ENDING MERCHANDISE
INVENTORY IS GREATER THAN BEGINNING MERCHANDISE
Merchandise Inventory
INVENTORY
Jan. 1 Bal.
Adj. (d)
(New Bal.
294,700.00
4,200.00
298,900.00)
Income Summary
Adj. (d)
12
LESSON 14-3
4,200.00
page 417
8. Planning and Adjusting Allowance for
Uncollectible Accounts
Uncollectible Accounts – accounts receivable that cannot
be collected (customer that will not pay)
-
-
This risk is recorded as an expense in same accounting period
revenue is earned (Concept: Matching expenses with revenue)
Since we do not know which accounts receivable, an estimate is
calculated and expensed
Expense
13
Asset
Asset (contra account)
8. Planning and Adjusting Allowance for
Uncollectible Accounts
Two objectives of estimating this:
- 1. Reports Balance Sheet amount for Accts. Rec. that reflect what is
expected to be collected in future
- 2. Recognizes the expense for uncollectible amounts in same fiscal
period
Allowance method of recording losses from uncollectible accounts
– crediting the estimated value of uncollectible amounts to a contra
account
Book value – the difference between an asset’s account balance and its
related contra account
14
Book value of accounts receivable – difference between accounts
receivable and allowance for uncollectible accounts
ESTIMATING UNCOLLECTIBLE
ACCOUNTS EXPENSE
15
page 420
Many companies use a percentage of total sales method – based on experience
Total Sales
on Account
×
Percentage
=
Estimated
Uncollectible
Accounts Expense
$124,500.00
×
1%
=
$1,245.00
LESSON 14-4
page 421
ANALYZING AND RECORDING AN ADJUSTMENT FOR
UNCOLLECTIBLE ACCOUNTS EXPENSE
3
1
3
2
1. Enter the estimated uncollectible
amount.
2. Enter the same amount in the
Adjustments Debit column.
3. Label the two parts with a small letter
e in parentheses.
16
LESSON 14-4
9. Planning and Adjusting for Depreciation
Current assets – cash and other assets expected to be
exchanged for cash or consumed in one year
Plant assets – assets that will be used for a number of
years in the operation of a business
- three major types: equipment, buildings, land
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
17
Depreciation
Three factors in calculating annual amount of depreciation:
1. Original cost
2. Estimated salvage value – the amount an owner
expects to receive when a plant asset is removed
from use (residual value or scrap value)
3. Estimated useful life (physical depreciation
<wear and weather> and functional depreciation
<inadequate or obsolete>)
18
Straight-Line Depreciation
Straight-Line depreciation – charging an equal amount of
depreciation expense for a plant asset each year
Original
Cost
$1,250.00
Estimated Total
Depreciation
Expense
$1,000.00
19
Estimated
Salvage Value
–
–
$250.00
÷
Years of
Estimated
Useful Life
÷
5
=
Estimated Total
Depreciation
Expense
=
$1,000.00
=
Annual
Depreciation
Expense
=
$200.00
Accumulated Depreciation
Accumulated depreciation – the total amount of
depreciation expense that has been recorded since the
purchase of a plant asset
20X2
Accumulated
Depreciation
20X3
+ Depreciation =
Expense
$400.00
+
$200.00
Asset (contra account)
20
20X3
Accumulated
Depreciation
=
$600.00
Calculating Book Value
Book value of a plant asset – the original cost of a plant
asset minus accumulated depreciation
21
Original Cost
–
Accumulated
Depreciation
=
Ending
Book Value
$1,250.00
–
$600.00
=
$650.00
ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATIONpage 425
EXPENSE
3
2
3
1
1. Write the debit amounts.
2. Write the credit amounts.
3. Label the adjustments.
22
LESSON 14-5
10. Calculating Federal Income Tax and Completing
a Work Sheet
Corporations anticipating annual federal taxes ≥ $500
required to pay estimated taxes quarterly (April, June, September, December)
Corporations calculate federal income tax owed at the end
of the fiscal year and file annual return
23
10. Calculating Federal Income Tax and Completing
a Work Sheet
In order to adjust federal income tax, first determine net
income before income tax expense
1.
2.
3.
4.
Complete all other adjustments on the work sheet
Extend all amounts except Federal Income Tax Expense
Separately, total Income Statement columns
Calculate the difference between the Income Statement
Debit total and Income Statement Credit total.
(Difference represents net income prior to federal income tax)
24
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
25
LESSON 14-6
page 427
$ 500,253.10
–396,049.91
$ 104,203.19
10. Calculating Federal Income Tax and Completing
a Work Sheet
The amount
of federal
income tax
expense is
calculated
using a tax
rate table
provided by
IRS
26
RECORDING THE FEDERAL INCOME
TAX ADJUSTMENT
page 429
3
1
1
1. Calculate the amount
of federal income tax
expense adjustment.
27
2
LESSON 14-6
3
2. Total and rule the Adjustments
columns.
3. Extend account balances.
COMPLETING A WORK SHEET
1
page 430
1
2
4
1.
2.
3.
4.
5.
28
5
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.
Rule double lines.
LESSON 14-6
3
A COMPLETED 8-COLUMN
WORK SHEET
29
LESSON 14-6
page 432
A 10-COLUMN WORK SHEET
1
2
3
page 434-435
5
4
6
1.
2.
3.
4.
30
Trial balance
Adjustments
Extend adjusted balances
Total, prove, and rule
LESSON 14-6
5. Extend balances
6. Calculate net income; total,
prove and rule