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.
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Tax Estimates
1. At the beginning of the year, Sports Outfitters Corporation estimated its tax liability for 2010 to be $35,976.
2. Sports Outfitters Corporation makes quarterly deposits during the year. ($35,976
2010
Apr. 15 Income Tax Expense Cash Quarterly income tax deposit.
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4 = $8,994)

8,994.00 8,994.00

3. At year-end, Sports Outfitters Corporation recomputes the estimated income tax expense and compares it to the tax deposits made during the year. New estimated tax expense $36,520

Quarterly tax deposits Additional tax due $

35,976 544

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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

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Year-End Adjustment of Tax Liability

When books are closed at year-end, the income tax expense is re-computed.

The Income Tax Expense account is adjusted.

2010 Dec. 31 Income Tax Expense Income Tax Payable Estimate of additional tax due. 544.00 544.00

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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.

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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.
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Corporate Worksheet Income Tax Adjustment

Total the Income Statement Columns before the adjustment for income tax. Debit Credit 1,971,410 2,108,000

Net income before tax

136,590

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Corporate Worksheet Income Tax Adjustment

Compute the income tax expense:
First Next Next Last $ 50,000 x 15 % $ 25,000 x 25 % $ 25,000 x 34 % $ 36,590 x 39 % (rounded) $ 7,500 6,250 8,500 14,270 $36,520

Tax on $136,590

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Corporate Worksheet Income Tax Adjustment

Compute the income tax adjustment:
Tax deposit April 15 Tax deposit June 15 Tax deposit September 15 Tax deposit December 15 Total tax deposits $ 8,994 8,994 8,994 8,994 $35,976

Total tax expense

Tax adjustment additional tax due
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36,520
$ 544

Corporate Worksheet Income Tax Adjustment

Record the income tax adjustment in the Adjustments section of the worksheet: Income Tax Expense: $544.00 debit $544.00 credit Income Tax Payable:

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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.

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The last closing entry for a corporation transfers the net income after income taxes (or the net loss) from the Income Summary account to Retained Earnings.
GENERAL JOURNAL
DATE 2010 Dec. 31 Income Summary Retained Earnings 100,070.00 100,070.00 DESCRIPTION POST REF. DEBIT CREDIT

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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.

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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

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Record the declaration and issuance of stock dividends

Stock Dividend

A stock dividend is a distribution of corporations 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 Dividends Distributable account.
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Common Stock Dividend Distributable Account

The common stock dividend distributable account is an equity account.

Used to record par or stated value of shares to be issued as a result of a stock dividend declaration.

The excess of market value over par value is credited to Paid-in Capital in Excess of Par.
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To Record Stock Dividends

Declaration

Debit: Retained Earnings Credit: Common Stock Dividend Distributable Credit: Paid-in Capital in Excess of ParCommon

Distribution Debit: Common Stock Dividend Distributable Credit: Common Stock

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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

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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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Stock Split
Only a memorandum entry is needed in the general journal.
2010
Dec. 1 On this date the board of directors declared a 3-for-1 stock split and reduced the stated value of common stock from $75 to $25 per share. Total outstanding shares will be 120,000.

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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.
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An appropriation of retained earnings reduces the amount of retained earnings available for dividend declarations.

It does not mean that cash has been set aside in a fund.
2010 Oct. 5 Retained Earnings Retained Earnings Appropriated for Retail Center Construction Appropriation for construction made by board of directors on October 5. 60,000.00

60,000.00

Notice that no entry is made to the Cash account.

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Record a corporations receipt of donated assets

QUESTION:

What is donated capital?

ANSWER:

Donated capital is capital resulting from the receipt of gifts by a corporation.

Donated capital is recorded at its fair market value.

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A community that wishes to attract new industry may give a corporation a plant site or building as an inducement for the corporation to move to the community.
2010 Jan. 2 Land Donated Capital Appraised value of plant site donated by city. 100,000.00 100,000.00

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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 of stockholders who need cash or want to retire (privately held corporations).
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Record the Purchase of Treasury Stock

2010 Jan. 10 Treasury Stock - Preferred Cash Purchased 400 shares of treasury stock. 21,200.00 21,200.00

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Prepare financial statements for 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

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QUESTION:

What is a statement of retained earnings?

ANSWER:

A statement of retained earnings is a financial statement that shows all changes that have occurred in retained earnings during the period.

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The Corporate Balance Sheet

The Balance Sheets asset and liability sections are very similar to a sole proprietorships.

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