Chapter 21 - Corporate Earnings and Capital Transactions

Question 1

ACCOUNTING FOR CORPORATE EARNINGS

Reporting Income Tax Expense on the Income Statement

Answer 1

1. As a deduction at the bottom of the income statement, after Net Income Before Income Tax
2. As an operating expense, to emphasize that taxes represent a cost of doing business

Question 2

ACCOUNTING FOR CORPORATE EARNINGS

Deferred Income Taxes

Answer 2

• Income can be included in taxable income this year and appear on the financial statements in later years, or vice versa
• Income can be included on the financial statements but never appear in taxable income
• Expenses can be included in taxable income this year and appear on the financial statements in later years, or vice versa
• Expenses can be included on the financial state,ends and never be deducted from taxable income
• the amount of taxes that will be payable in the future as a result of the difference between taxable income and income for financial statement purposes in the current year and in past years

Question 3

ACCOUNTING FOR CORPORATE EARNINGS

Completing the Corporate Worksheet

Answer 3

Step 1. Enter the trial balance in the Trial Balance section
Step 2. Enter the adjustments (except the adjustment to income tax expense) in the Adjustments section of the worksheet
Step 3. Extend the balances of all income and expense amounts (except income tax expense) to the Income Statement section of the worksheet
Step 4. Compute income tax based on income before tax
Step 5. Total the columns in the Adjustments section
Step 6. Total the Debit and Credit columns of the Income Statement section
Step 7. Extend the adjusted balance of the asset, liability, and stockholders’ equity accounts to the Balance Sheet columns.

Question 4

ACCOUNTING FOR RETAINED EARNINGS

paid-in capital or contributed capital

Answer 4

• capital acquired from capital stock transactions (also known as contributed capital)

Question 5

ACCOUNTING FOR RETAINED EARNINGS

retained earnings

Answer 5

• the cumulative profits and losses of the corporation not distributed as dividends

Question 6

ACCOUNTING FOR RETAINED EARNINGS

declaration date

Answer 6

• the date on which the board of directors declares a dividend

Question 7

ACCOUNTING FOR RETAINED EARNINGS

record date

Answer 7

• the date on which the specific stockholders to receive a dividend are determined

Question 8

ACCOUNTING FOR RETAINED EARNINGS

stockholders of record

Answer 8

• stockholders in whose name stares are held on date of record and who will receive a declared dividend

Question 9

ACCOUNTING FOR RETAINED EARNINGS

payment date

Answer 9

• the date that dividends are paid

Question 10

ACCOUNTING FOR RETAINED EARNINGS

stock dividend

Answer 10

• distribution of the corporation’s own stock on a pro rate basis that results in conversion of a portion of the firm’s retained earnings to permanent capital.

Question 11

ACCOUNTING FOR RETAINED EARNINGS

book value

Answer 11

• the total equity applicable to a class of stock divided by the number of shares outstanding

Question 12

ACCOUNTING FOR RETAINED EARNINGS

stock split

Answer 12

• occurs when a corporation issues two or more shares of new stock to replace each share outstanding without making any changes in the capital accounts

Question 13

ACCOUNTING FOR RETAINED EARNINGS

appropriation of retained earnings

Answer 13

• a formal declaration of an intention to restrict dividends

Question 14

OTHER CAPITAL TRANSACTIONS AND FINANCIAL STATEMENTS

donated capital

Answer 14

• capital resulting from the receipt of gifts by a corporation

Question 15

OTHER CAPITAL TRANSACTIONS AND FINANCIAL STATEMENTS

treasury stock

Answer 15

• a corporation’s own capital stock that has been issued and reacquainted; the stock must have been previously paid in full and issued to a stockholder

Question 16

OTHER CAPITAL TRANSACTIONS AND FINANCIAL STATEMENTS

statement of retained earnings

Answer 16

• a financial statement that shows all changes that have occurred in retained earnings during the period

Question 17

OTHER CAPITAL TRANSACTIONS AND FINANCIAL STATEMENTS

statement of stockholders’ equity also known as analysis of changes in stockholders’ equity

Answer 17

• a financial statement that provides an analysis reconciling the beginning and ending balance of each of the stockholders’ equity accounts