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McGraw-Hill/Irwin
Learning Objective 1
Compute and record corporate income tax.
Corporations pay taxes based on their taxable income.
LO1
Surf Outlet expects taxable income of $210,000 for 2010. Its estimated tax liability is computed as follows:
Taxable Income Level Amount 1st $ 50,000 2nd 25,000 3rd 25,000 4th 110,000 Total $ 210,000
16,287.50 16,287.50
Surf Outlets quarterly tax payments are $16,287.50 ($65,150/4 quarters). We record the entry for the first quarterly income tax payment on April 15 by debiting Income Tax Expense for $16,287.50 and crediting Cash for the same amount. 21-2
LO1
6,133.53 6,133.53
Underpayment of Taxes
Tax payments made in 2010 Tax liability in 2010 Additional taxes owed
$ $
1,436.37 1,436.37
21-3
Learning Objective 2
Record transactions involving cash dividends.
LO2
On January 19, a $1 per share cash dividend is declared on Dana, Inc.s 10,000 common shares outstanding. The dividend will be paid on March 19 to stockholders of record on February 19.
Date of Declaration
10,000
Date of Record
No entry required.
LO2
Mar. 19
10,000 10,000
LO3
Learning Objective 3
Account for stock dividends and stock splits.
The corporation distributes additional shares of its own stock to its stockholders without receiving any payment in return.
Can be used to keep the market price of the stock affordable. Can provide evidence of managements confidence that the company is doing well.
21-6
LO3
Dec. 31 Retained Earnings 20,000 Common Stock Dividend Distributable Paid-In Capital in Excess of Par Value
Declared a 2,000 share (2%) stock dividend
2,000 18,000
On December 31, 2010, Quest declared a 2% stock dividend, when its stock was selling for $10 per share. The stock will be distributed to stockholders on January 20, 2011. Now lets make the January 20 entry.
2,000 2,000
LO3
20,000 20,000
A stock split is the distribution of additional shares to stockholders according to their percent ownership. A 2-for-1 stock split replaces 100,000 shares of $20 par value stock with 200,000 shares of $10 par value stock. Market value is reduced from $88 per share to about $44 per share. The split does not affect any balance sheet amounts or any individual stockholders percent ownership. Both the Paid-In Capital and Retained Earnings accounts are unchanged by a split, and no journal entry is made.
21-8
Learning Objective 4
Distribute dividends between common stock and preferred stock.
LO4
See how this dividend is distributed if the preferred stock is cumulative and if it is noncumulative.
If Preferred Stock is Noncumulative: Year 2009: No dividends paid. Year 2010: 1. Pay 2010 preferred dividend. 2. Remainder goes to common.
If Preferred Stock is Cumulative: Preferred Common Year 2009: No dividends paid. $ $ Year 2010: 1. Pay 2009 preferred dividend in arrears. $ 9,000 2. Pay 2010 preferred dividend. 9,000 3. Remainder goes to common. $ 24,000 Totals $ 18,000 $ 24,000
21-9
Learning Objective 5
Record purchases and sales of treasury stock.
LO5
On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $8,000.
May 8 Treasury Stock, Common Cash at $4 per share 8,000 8,000
400 400
LO5
2,000 2,000
Shares Per Share Total Cost 400 $ 4.00 $ 1,600 Sale 400 1.50 600 Difference $ 1,000
21-11
Learning Objective 6
Describe events that can affect retained earnings.
LO6
Retained earnings can have legal or contractual restrictions. In most states, the corporate charters will not allow companies to purchase treasury stock in excess of the balance in retained earnings. Some loan agreements place restrictions on how much dividends can be based on the balance in retained earnings. A corporations directors can voluntarily limit dividends because of a special need for cash such as the purchase of new facilities.
21-12
Learning Objective 7
Prepare a statement of retained earnings. The Statement of Retained Earnings is a summary of the activity that occurred in Retained Earnings during the period
LO7
Reed, Inc. Statement of Retained Earnings For Year Ended December 31, 2010 Retained earnings, 12/31/09 Plus: net income Less: dividends declared Retained earnings, 12/31/10 $ 875,000 155,600 (80,000) $ 950,600
21-13
Learning Objective 8
Prepare a statement of stockholders equity. Many companies issue a Statement of Stockholders Equity rather than the Statement of Retained Earnings. The Statement of Stockholders Equity is more inclusive and discloses changes in all equity accounts, not just Retained Earnings.
Matrix, Inc. Statement of Stockholders' Equity For the Year Ended December 31, 2010 Common stock and (In millions) capital in excess of par Shares Amount Balance at January 1, 2010 821 $ 2,500 Stock sales 17 500 Stock repurchases and retirement (17) (260) Cash dividends declared Other, net Net income Balance at December 31, 2010 821 $ 2,740 Retained Earnings $ 9,500 (925) (150) 70 5,100 $ 13,595
LO8
21-14
Learning Objective 9
Compute earnings per share and describe its use.
LO9
Basic Net income - Preferred dividends earnings = Weighted-average common shares outstanding per share
21-15
LO10
Learning Objective 10
Compute price-earnings ratio and describe its use.
PE Ratio
This measure is often used by investors as a general guideline in gauging relative stock values.
21-16
Learning Objective 11
Compute dividend yield and explain its use.
LO11
Dividend Annual cash dividends per share = Yield Market value per share
This ratio identifies the return, in terms of cash dividends, on the current market price of the stock.
21-17
End of Chapter 21
21-18