CHAPTER 14

Distributing Dividends and Preparing a Work Sheet for a Merchandising Business

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STOCKHOLDERS’ EQUITY ACCOUNTS USED BY A CORPORATION page 405

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

A corporation’s ownership is divided into units.•Each unit of ownership is known as a share of stock.•An owner of one or more shares of a corporation is known as a stockholder.•Each stockholder is an owner of the company•Capital Stock is the shareholders owner’s equity account.•Retained Earnings is the account for money that will be retained by the company for business expansion.•Dividends - A temporary account used to record the distribution of earnings (dividends) to stockholders.

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DECLARING A DIVIDEND

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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 cr.6. Write the credit amount.

Board of Directors - A group of persons elected by the stockholders to manage a corporation.

-An action by the board to distribute earnings to shareholdersis called declaring a dividend.

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PAYING A DIVIDEND

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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.

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RECORDING A TRIAL BALANCE ON A WORK SHEETpage 410

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221. Account title

2. Account balance

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

14-2 Beginning an 8-Column Worksheet for a Merchandising Business

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RECORDING SUPPLIES ADJUSTMENTS ON A WORK SHEET page 412

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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.

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ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT

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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.

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14-3 Planning & Recoding Merchandise Inventory Adjustment page 415

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ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT

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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.

Merchandise inventory - the amount of goods on hand for sale to customers.

10ANALYZING AN ADJUSTMENT WHEN ENDING MERCHANDISE INVENTORY IS GREATER THAN BEGINNING MERCHANDISE INVENTORY page 417

Jan. 1 Bal. 294,700.00

Adj. (d) 4,200.00

(New Bal. 298,900.00)

Merchandise Inventory

Adj. (d) 4,200.00

Income Summary

1114-4 PLANNING AND RECORDING AN ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS ADJUSTMENT

page 419

When you sell on account you take the risk that a customer will not pay.

Uncollectible Accounts - Accounts receivable that cannot be collected.• This risk is a cost of doing business that should be recorded as an

expense in the same accounting period the revenue is earned.

We cannot predict which exact accounts will be uncollectible - if so, we could credit each accounts receivable account. So we estimate. Estimating accomplishes two objectives:1. Reports balance sheet amount for Accts. Receivable to reflect

the amount we expect to collect in the future.• Recognizes the expense of uncollectible accounts in the same

period in which related revenue is recorded.

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EstimatedUncollectible

Accounts Expense

=Percentage×Total Saleson Account

$1,245.00=1%×$124,500.00

ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE page 420

Many businesses use a percentage of total sales on accountTo estimate uncollectible accounts expense. Hobby Shack Uses 1%.

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1. Enter the estimated uncollectible amount.

ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE

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

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

Accounts Receivable - Balance of Allowance

Accounts Receivable - Bal. of Allow for Uncollectible Accts. = Book Value of Accts. Rec.

$14,698.40 - $1,372.52 = $13,325.88

LESSON 14-5 Planning & Recording Depreciation Adjustments

Most businesses use two broad categories of assets.

Current Assets - Cash and other assets expected to be exchanged for cash or consumed within one year.Plant Assets - Assets that will be used for a number of years - computers, cash registers, furniture, etc.

May have three major types of plant assets - Equipment, Buildings, & Land

In order to match revenue with expenses used to earn the revenue, thecost of a plant asset should be expensed over the plant asset’s usefullife. A portion of a plant asset’s cost is transferred to an expenseaccount in each fiscal period the asset is used to earn revenue.•Depreciation Expense - The portion of a plant assets cost that istransferred each fiscal period of the assets useful life.

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CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424

Estimated TotalDepreciation

Expense=

EstimatedSalvage Value

–Original

Cost

$1,000.00=$250.00–$1,250.00

AnnualDepreciation

Expense=

Years ofEstimated

Useful Life÷

Estimated TotalDepreciation

Expense

$200.00=5÷$1,000.00

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.

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(continued on next slide)

Straight-line Method

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CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424

20X3AccumulatedDepreciation

=20X3

DepreciationExpense

+20X2

AccumulatedDepreciation

$600.00=$200.00+$400.00

EndingBook Value

=AccumulatedDepreciation

–Original Cost

$650.00=$600.00–$1,250.00

(continued from previous slide)

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ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE

page 425

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1. Write the debit amounts.

2. Write the credit amounts.

3. Label the adjustments.

LESSON 14-6 Calculating Federal Income Tax and Completing a Work Sheet

Corporations owing more than $500 a year in federal income taxesare required to pay estimated federal taxes each quarter.-However you do not know what you actually owe until the end of the fiscal year.

Hobby Shack estimated $18,000 in federal income tax and madefour quarterly payments of $4,500. At the end of the fiscal period,we can calculate what we actually owe using the work sheet.

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FEDERAL INCOME TAX EXPENSE ADJUSTMENTpage 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

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CALCULATING FEDERAL INCOME TAXpage 428

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

RECORDING THE FEDERAL INCOME TAX ADJUSTMENT

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2. Total and rule the Adjustments columns.

3. Extend account balances.

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COMPLETING A WORK SHEET

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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.

After recording the adjustment for federalincome tax, the worksheet is ready to becompleted.

23A COMPLETED 8-COLUMN A COMPLETED 8-COLUMN WORK SHEETWORK SHEET

page 432

24A 10-COLUMN WORK SHEETA 10-COLUMN WORK SHEET

page 434-435

1. Trial balance

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5. Extend balances2. Adjustments3. Extend adjusted balances

4. Total, prove, and rule

6. Calculate net income; total, prove and rule

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Some large businesses with many accounts to be adjusted may use the 10 column worksheet.