Distributing Dividends and Preparing a Worksheet for a Merchandising Business

2 LESSON 14-1

page 405

(3000) STOCKHOLDERS’ EQUITY3110 Capital Stock3120 Retained Earnings3130 Dividends3140 Income Summary

3

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)

4 LESSON 14-1

11

2233

44

55 66

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. Write the debit amount.

3. Write the memorandum number.

2. Write the title of the account debited.

1. Write the date.

5. Write the title of the account credited.

6. Write the credit amount.

5 LESSON 14-1

11 22 33 44 55

page 407

January 15. Paid cash for quarterly dividend declared December 15, $5,000.00. Check No. 379.

1. Write the date.

2. Write the account title.

3. Write the check number.

4. Write the debit account.

5. Write the credit amount.

6 LESSON 14-2

page 410

11

33

221. Account title

2. Account balance

3. Total, prove, and rule the debit and credit columns

7 LESSON 14-2

page 411

Adj. (a) 2,730.00

Supplies Expense—Office

Dec. 31 Bal. 3,480.00 Adj. (a) 2,730.00

(Adj Bal. 750.00)

Supplies—Office

Adj. (b) 2,910.00

Supplies Expense—Store

Dec. 31 Bal. 3,944.00 Adj. (b) 2,910.00

(Adj Bal. 1,034.00)

Supplies—Store

8 LESSON 14-2

page 412

22

11

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.

33

33

9 LESSON 14-2

11

22

33

33

page 413

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.

10

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)

11 LESSON 14-3

11

2233

33

page 416

1. Write the debit amount.

3. Label the two parts of this adjustment with a small letter d in parentheses.

2. Write the credit amount.

No direct temporary account (expense) so Income Summary is used for the adjustment

12 LESSON 14-3

page 417

Jan. 1 Bal.Jan. 1 Bal. 294,700.00294,700.00

Adj. (d) 4,200.00

(New Bal. 298,900.00)

Merchandise Inventory

Adj. (d) 4,200.00

Income Summary

13

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

Asset (contra account)AssetExpense

14

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

Book value of accounts receivable – difference between accounts receivable and allowance for uncollectible accounts

15

LESSON 14-4

EstimatedUncollectible

Accounts Expense=Percentage×

Total Saleson Account

$1,245.00=1%×$124,500.00

ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE page 420

Many companies use a percentage of total sales method – based on experience

16 LESSON 14-4

1. Enter the estimated uncollectible amount.

3.Label the two parts with a small letter e in parentheses.

11

22

33

33

page 421

2. Enter the same amount in the Adjustments Debit column.

17

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

18

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>)

19

Straight-Line depreciation – charging an equal amount of depreciation expense for a plant asset each year

Estimated TotalDepreciation

Expense=Estimated

Salvage Value–Original

Cost

AnnualDepreciation

Expense=

Years ofEstimated

Useful Life÷

Estimated TotalDepreciation

Expense

$1,000.00=$250.00–$1,250.00

$200.00=5÷$1,000.00

20

Accumulated depreciation – the total amount of depreciation expense that has been recorded since the purchase of a plant asset

20X3AccumulatedDepreciation

=20X3

DepreciationExpense

+20X2

AccumulatedDepreciation

$600.00=$200.00+$400.00

Asset (contra account)

21

Book value of a plant asset – the original cost of a plant asset minus accumulated depreciation

EndingBook Value

=AccumulatedDepreciation

–Original Cost

$650.00=$600.00–$1,250.00

22 LESSON 14-5

page 425

11

22

33

33

1. Write the debit amounts.

2. Write the credit amounts.

3. Label the adjustments.

23

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

24

In order to adjust federal income tax, first determine net income before income tax expense

1. Complete all other adjustments on the work sheet2. Extend all amounts except Federal Income Tax Expense3. Separately, total Income Statement columns4. Calculate the difference between the Income Statement

Debit total and Income Statement Credit total. (Difference represents net income prior to federal income tax)

25 LESSON 14-6

page 427

Total of Income Statement Credit column $

500,253.10Less total of Income Statement Debit column

before federal income tax–

396,049.91Equals Net Income before Federal Income Tax $

104,203.19

26

The amount of federal income tax expense is calculated using a tax rate table provided by IRS

27 LESSON 14-6

1. Calculate the amount of federal income tax expense adjustment.

22

33

33

11

11

page 429

2. Total and rule the Adjustments columns.

3. Extend account balances.

28 LESSON 14-6

11 11

page 430

2244 3355

1. Total the Income Statement and Balance Sheet columns.

5. Rule double lines.

4. Calculate the column totals.

3. Extend the net income amount.

2. Calculate and enter the net income after federal income tax.

29 LESSON 14-6

page 432

30 LESSON 14-6

page 434-435

1. Trial balance

4466

22 33 55

5. Extend balances

2. Adjustments

3. Extend adjusted balances

4. Total, prove, and rule

6. Calculate net income; total, prove and rule

11