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Chapter 14—Distributing Dividends and Preparing a Work Sheet for a Merchandising Business

Chapter 14—Distributing Dividends and Preparing a Work Sheet for a Merchandising Business. Objectives: Define accounting terms and identify accounting concepts and practices related to distributing dividends and preparing a work sheet for a merchandising business

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Chapter 14—Distributing Dividends and Preparing a Work Sheet for a Merchandising Business

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  1. Chapter 14—Distributing Dividends and Preparing a Work Sheet for a Merchandising Business • Objectives: • Define accounting terms and identify accounting concepts and practices related to distributing dividends and preparing a work sheet for a merchandising business • Journalize the declaration and payment of a dividend • Begin a work sheet for a merchandising business • Plan work sheet adjustments for merchandise inventory, supplies, prepaid insurance, uncollectible accounts, and depreciation • Calculate federal income tax and plan the work sheet adjustments for federal income tax • Complete a work sheet for a merchandising business LESSON 14-1

  2. TERMS REVIEW current assets plant assets depreciation expense estimated salvage value straight-line method of depreciation accumulate accumulated depreciation book value of a plant asset • retained earnings • dividends • board of directors • declaring a dividend • merchandise inventory • uncollectible accounts • allowance method of recording losses from uncollectible accounts • book value • book value of accounts receivable LESSON 14-1

  3. LESSON 14-1: Distribute Corporate Earnings to Stockholders Each unit of ownership in a corporation is known as a share of stock. An owner of one or more shares of a corporation is known as a stockholder. Net income of a corporation can be retained in the business or paid to stockholders. A single owners’ equity account, titled Capital Stock, is used for the investment of all owners. Retained Earnings—an amount earned by a corporation and not yet distributed to stockholders; used to record a corporation’s earnings Dividends—earnings distributed to stockholders; is a temporary account that is closed to Retained Earnings at the end of the fiscal period

  4. STOCKHOLDERS’ EQUITY ACCOUNTS USED BY A CORPORATION page 405 (3000) STOCKHOLDERS’ EQUITY 3110 Capital Stock 3120 Retained Earnings 3130 Dividends 3140 Income Summary LESSON 14-1

  5. DECLARING A DIVIDEND page 406 • Board of Directors—a group of persons elected by the stockholders to manage a corporation; determines the amount of dividends • Most corporations issue quarterly dividends. • Number of shares outstanding X quarterly dividend per share = total quarterly dividend • Declaring a dividend—action by a board of directors to distribute corporate earnings to stockholders • Declared dividends cannot exceed the balance of the retained earnings account • Dividends are declared on one date and paid on a later date • Are a liability to the corporation • Dividends are a distribution of net income and are not an expense of the corporation LESSON 14-1

  6. 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 6 1. Write the date. 4. Write the debit amount. 2. Write the title of the account debited. 5. Write the title of the account credited. 3. Write the memorandum number. 6. Write the credit amount. LESSON 14-1

  7. PAYING A DIVIDEND page 407 • Dividends Payable is a current liability • The check written transfers cash into a special account used solely for dividend checks • Dividends are declared on one date and paid on a later date. Only stockholders owning the stock on the date of record specified by the board of directors receive the dividend. Stockholders owning the stock on the date of record receive the entire dividend, regardless of how long they have owned the stock. LESSON 14-1

  8. PAYING A DIVIDEND page 407 January 15. Paid cash for quarterly dividend declared December 15, $5,000.00. Check No. 379. 1 2 3 4 5 1. Write the date. 2. Write the account title. 3. Write the check number. 4. Write the debit amount. 5. Write the credit amount. LESSON 14-1

  9. LESSON 14-1 Let’s do Work Together 14-1 and On Your Own 14-1 on textbook page 408.

  10. LESSON 14-2--Beginning an 8-Column Work Sheet for a Merchandising Business A work sheet is used to plan adjustments and sort financial statement information. A work sheet may be prepared whenever a business wishes to summarize and report financial information. To begin the preparation of a work sheet, all the general ledger account balances are transferred to the work sheet.

  11. RECORDING A TRIAL BALANCE ON A WORK SHEET page 410 • General ledger account balances are recorded in the Trial Balance columns of the work sheet. • Care must be taken to record general ledger accounts with debit balances in the Debit column of the Trial Balance columns and general ledger accounts with credit balances in the Credit column of the Trial Balance columns. • All general ledger account titles should be listed in the Account Title column of the work sheet, including those accounts that do not have a balance. This will ensure that all accounts are accounted for in the summarizing process. LESSON 14-2

  12. 1 2 RECORDING A TRIAL BALANCE ON A WORK SHEET page 410 1. Account title 2. Account balance 3. Total, prove, and rule the debit and credit columns 3 LESSON 14-2

  13. ANALYZING AND RECORDING SUPPLIES ADJUSTMENTS page 411 Four questions are asked to analyze the adjustments for the supplies accounts: What is the balance of the Supplies account? What should the balance be for these accounts? What must be done to correct the account balances? What adjustment is made? The adjustment for supplies is the value of supplies used. The new correct balance will be the amount reported on the financial statements. LESSON 14-2

  14. Supplies Expense—Office Adj. (a) 2,730.00 Supplies—Office Dec. 31 Bal. 3,480.00 Adj. (a) 2,730.00 (Adj Bal. 750.00) Supplies Expense—Store Adj. (b) 2,910.00 Supplies—Store Dec. 31 Bal. 3,944.00 Adj. (b) 2,910.00 (Adj Bal. 1,034.00) ANALYZING AND RECORDING SUPPLIES ADJUSTMENTS page 411 LESSON 14-2

  15. 3 3 RECORDING SUPPLIES ADJUSTMENTS ON A WORK SHEET page 412 2 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. LESSON 14-2

  16. ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT page 413 Four questions are asked to analyze the adjustment for the prepaid insurance account: What is the balance of Prepaid Insurance? What should the balance be for this account? What must be done to correct the account balance? What adjustment is made? The adjustment for Prepaid Insurance is the amount of insurance used or expired. The new correct balance will be the amount reported on the financial statements. LESSON 14-2

  17. 3 3 ANALYZING AND RECORDING A PREPAID INSURANCE ADJUSTMENT page 413 1 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. LESSON 14-2

  18. LESSON 14-2 Let’s do Work Together 14-2 and On Your Own 14-2 on textbook page 414.

  19. LESSON 14-3: Planning and Recording a Merchandise Inventory Adjustment Merchandise Inventory—the amount of goods on hand for sale to customers; is an asset account with a normal debit balance The balance in Merchandise Inventory is the beginning of the year balance. All purchases during the year have been recorded in the purchases account, and all sales have been recorded in the sales account. Therefore, Merchandise Inventory must be brought up to date.

  20. MERCHANDISE INVENTORY page 415 LESSON 14-3

  21. ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT page 416 • At the end of the year, Merchandise Inventory is counted to determine how much is on hand at year-end. • The amount of ending inventory is the amount that must show on the balance sheet at the end of the year. • Income Summary is the related temporary account used for adjusting Merchandise Inventory. • The difference between the beginning Merchandise Inventory and the ending inventory will be transferred to Income Summary. What is the balance of Merchandise Inventory? What should the balance be for this account? What must be done to correct the account balance? What adjustment is made? LESSON 14-3

  22. 3 3 ANALYZING AND RECORDING A MERCHANDISE INVENTORY ADJUSTMENT page 416 2 1 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. LESSON 14-3

  23. Merchandise Inventory Jan. 1 Bal. 294,700.00 Adj. (d) 4,200.00 (New Bal. 298,900.00) Income Summary Adj. (d) 4,200.00 ANALYZING AN ADJUSTMENT WHEN ENDING MERCHANDISE INVENTORY IS GREATER THAN BEGINNING MERCHANDISE INVENTORY page 417 Remember: When an account that requires adjusting does not have a related expense account, the temporary account Income Summary is used. LESSON 14-3

  24. LESSON 14-3 Let’s do Work Together 14-3 and On Your Own 14-3 on textbook page 418.

  25. LESSON 14-4: Planning and Recording an Allowance for Uncollectible Accounts Adjustment 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 that the revenue is earned. A business can calculate and record an estimated amount of uncollectible accounts expense. This accomplishes two objectives: It reports a balance sheet amount for Accounts Receivable that reflects the amount the business expects to collect in the future. It recognizes the expense of uncollectible accounts in the same period in which the related revenue is recorded.

  26. ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS page 419 To record estimated uncollectible accounts, an adjusting entry is made affecting the two accounts. The estimated amount of uncollectible accounts is debited to Uncollectible Accounts Expense and credited to Allowance for Uncollectible Accounts. An account that reduces a related account is known as a contra account. Allowance for Uncollectible Accounts is a contra account to its related asset account, Accounts Receivable. LESSON 14-4

  27. ALLOWANCE METHOD OF RECORDING LOSSES FROM UNCOLLECTIBLE ACCOUNTS page 419 Allowance method of recording losses from uncollectible accounts—crediting the estimated value of uncollectible accounts to a contra account Book value—difference between an asset’s account balance and its related contra account balance Book value of accounts receivable—the difference between the balance of Accounts Receivable and its contra account, Allowance for Uncollectible Accounts; represents the total amount of accounts receivable the business expects to collect in the future LESSON 14-4

  28. Total Saleson Account × Percentage = EstimatedUncollectibleAccounts Expense ESTIMATING UNCOLLECTIBLE ACCOUNTS EXPENSE page 420 1% $1,245.00 $124,500.00 × = A business takes a risk of loss with every sale on account. Net sales can be used if the company’s accounting records do not report total sales on account. A business determines the percentage by looking at past years accounting records. What factors might influence a business to increase or decrease the percentage from the amount indicated from past experience? Changing economic conditions & changes in credit approval policies LESSON 14-4

  29. 3. Label the two parts with a small letter e in parentheses. 3 3 ANALYZING AND RECORDING AN ADJUSTMENT FOR UNCOLLECTIBLE ACCOUNTS EXPENSE page 421 1 2 1. Enter the estimated uncollectible amount. 2. Enter the same amount in the Adjustments Debit column. LESSON 14-4

  30. Lesson 14-4 Let’s do Work Together 14-4 and On Your Own 14-4 on textbook page 422. LESSON 14-1

  31. Lesson 14-5: Planning and Recording Depreciation Adjustments Current Assets—cash and other assets expected to be exchanged for cash or consumed within a year Plant Assets—assets that will be used for a number of years in the operation of a business Businesses have three major types of plant assets: equipment, buildings, and land. Equipment must be replaced over the years. In order to match revenue with the expenses used to earn the revenue, the cost of plant asset should be expensed over the plant asset’s useful life. 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 LESSON 14-1

  32. Lesson 14-5: Planning and Recording Depreciation Adjustments Three factors are considered in calculating the annual amount of depreciation expense for a plant asset: Original cost Estimated Salvage Value—the amount an owner expects to receive when a plant asset is removed from use Estimated Useful life Two factors affect the useful life of a plant asset: Physical depreciation—wear and tear Functional depreciation—inadequate or obsolute LESSON 14-1

  33. CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424 (continued on next slide) Straight line method of depreciation—charging an equal amount of depreciation expense for a plant asset in each year of useful life LESSON 14-5

  34. OriginalCost Estimated TotalDepreciationExpense – ÷ EstimatedSalvage Value Years ofEstimatedUseful Life = = AnnualDepreciationExpense Estimated TotalDepreciationExpense CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424 (continued on next slide) 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. 1 $1,250.00 – $250.00 = $1,000.00 2 $1,000.00 ÷ 5 = $200.00 LESSON 14-5

  35. 20X2AccumulatedDepreciation Original Cost + – 20X3DepreciationExpense AccumulatedDepreciation = = 20X3AccumulatedDepreciation EndingBook Value CALCULATING DEPRECIATION EXPENSE AND BOOK VALUE page 424 (continued from previous slide) Accumulated Depreciation—thetotal amount of depreciation expense that has been recorded since the purchase of a plant asset $400.00 + $200.00 = $600.00 $1,250.00 – $600.00 = $650.00 Book value of a plant asset—the original cost of a plant asset minus accumulated depreciation LESSON 14-5

  36. 3 3 ANALYZING AND RECORDING ADJUSTMENTS FOR DEPRECIATION EXPENSE page 425 2 1 1. Write the debit amounts. 2. Write the credit amounts. 3. Label the adjustments. LESSON 14-5

  37. LESSON 14-5 Let’s do Work Together 14-5 and On Your Own 14-5 on textbook page 426

  38. LESSON 14-6: Calculating Federal Income Tax and Completing a Work Sheet How is an individual’s tax withholding similar to a corporation’s quarterly federal income tax payments? Both methods require taxpayers to make periodic tax payments to the government Before federal income tax can be determined, all adjustments must be completed on the work sheet and all amounts except Federal Income Tax Expense must be extended to the appropriate columns.

  39. Total of Income Statement Credit column $ 500,253.10 Less total of Income Statement Debit column before federal income tax –396,049.91 Equals Net Income before Federal Income Tax $ 104,203.19 FEDERAL INCOME TAX EXPENSE ADJUSTMENT page 427 LESSON 14-6

  40. CALCULATING FEDERAL INCOME TAX page 428 Income tax rates increase as the amount of net income increases. The five percentages shown at the top of the illustration are often referred to as tax brackets. LESSON 14-6

  41. 3 1 1 3 RECORDING THE FEDERAL INCOME TAX ADJUSTMENT page 429 The federal income tax payable is the federal income tax less than any estimated tax payments made in previous quarters. 2 1. Calculate the amount of federal income tax expense adjustment. 2. Total and rule the Adjustments columns. 3. Extend account balances. LESSON 14-6

  42. 1 1 2 4 5 3 COMPLETING A WORK SHEET page 430 1. Total the Income Statement and Balance Sheet columns. 2. Calculate and enter the net income after federal income tax. 3. Extend the net income amount. 4. Calculate the column totals. 5. Rule double lines. LESSON 14-6

  43. A COMPLETED 8-COLUMN WORK SHEET page 432 LESSON 14-6

  44. 2 3 1 5 A 10-COLUMN WORK SHEET page 434-435 4 6 1. Trial balance 5. Extend balances 6. Calculate net income; total, prove and rule 2. Adjustments 3. Extend adjusted balances 4. Total, prove, and rule LESSON 14-6

  45. Lesson 14-6 Let’s do Work Together 14-6 and On Your Own 14-6 on textbook page 436. LESSON 14-1

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