Corporations: Taxes, Earnings, Distributions, and the Statement of Retained Earnings

Typically, the only credit to the retained earnings account for a corporation is

net income of the period.

Most corporations must estimate their annual income taxes and make

quarterly payments.

To explain the change in the amount of retained earnings between successive balance sheet dates, it is customary to prepare a(n)

retained earnings statement.

If a corporation issues additional shares of its own stock to the stockholders on a proportional ownership basis, these are known as a

stock dividend.

An exchange of one share of an old issue of stock for multiple shares of a new issue with a reduced par or stated value is called a(n) ____________________.

stock split

An exchange of one share of an old issue of stock for a multiple number of shares of a new issue of stock with reduced par or stated value is known as a

stock split.

The purpose of a retained earnings appropriation is to inform readers of the balance sheet that

the appropriated amount is unavailable for dividends.

The appropriated retained earnings can be returned to the unappropriated retained earnings account

when the appropriation has served its purpose.

A dividend is declared by the

board of directors.

When a dividend is paid in cash, it is known as a

cash dividend.

The effect of a retained earnings appropriation is to

divide the retained earnings into two categories.

Stock dividends typically are stated as a percentage of common stock outstanding.

True

The ending balance of the retained earnings account on the statement of retained earnings is the same amount that appears in the stockholders' equity section of the balance sheet.

True

Corporations can legally declare cash dividends only if the retained earnings balance is sufficient to cover the dividends.

True

In corporate accounting, a distinction is made between paid-in or invested capital and capital resulting from retained earnings.

True

Income taxes for a corporation are normally reported as a separate expense item on the income statement.

True

Upon the date of declaration of a dividend, the corporation has incurred a liability for the dividend.

True

When a stock dividend is distributed, the account to be debited would be

Stock Dividends Distributable.

Dividends on different classes of capital stock should be accounted for separately.

True

Which of the following would not be shown on the statement of retained earnings?

the purchase of treasury stock

Corporations are subject to specific corporate tax rates different from those for individuals.

True

A board of directors may declare a dividend higher than the balance of the retained earnings account, as long as the cash balance is adequate to pay the dividends.

False

A credit balance in Income Summary represents net loss; a debit balance represents a net income.

False

A proportionate distribution of shares of a corporation's own stock to its stockholders is called a property dividend.

False

An adjusting entry is not required if the estimated payments made throughout the year are more than the actual taxes due.

False

Even if there are both appropriated and unappropriated retained earnings, the balances are combined when preparing the statement of retained earnings.

False

A retained earnings appropriation is a restriction of retained earnings by

the board of directors.

The owner of 100 shares of stock of a corporation with 2,000 shares of stock outstanding has a 5% interest in the total stockholders' equity. If a 20% stock dividend is declared and distributed, that stockholder would own which of the following number of shares?

120

The owner of 100 shares of stock of a corporation with 2,000 shares of stock outstanding has a 5% interest in the total stockholders' equity. If a 20% stock dividend is declared and distributed a 5% interest in the total stockholders' equity prior to the stock dividend, would have which of the following interests in the equity after the stock dividend was distributed?

5%

An entry to appropriate a portion of retained earnings to finance a future plant expansion would include a credit to

Appropriated Retained Earnings.

When a stock dividend is distributed, the account to be credited would be

Common Stock.

For a stock dividend of less than 20 to 25% of the outstanding shares, Stock Dividends is debited for the par value of the stock to be distributed.

False

If a 10% stock dividend is declared, an amount equal to the par value of the shares to be distributed should be charged to the retained earnings account.

False

If the corporation has a net loss for the period, the closing entry will include a debit to Income Summary and a credit to Retained Earnings.

False

One thing that the sole proprietorship and the corporate form of organization have in common is that neither must pay income taxes.

False

The names of stockholders entitled to receive dividends are determined on the date of payment.

False

The two major sources of capital for every type of business are capital that results from the investment of cash or other property by the owner or owners and capital that results from the receipt of dividends.

False

When a dividend is declared, Stock Dividends is debited and Cash is credited.

False

When an appropriation of retained earnings is made, total retained earnings is decreased.

False

A corporation may issue a stock dividend for which of the following reasons?

It may be short of cash and unable to pay a cash dividend.

Estimated quarterly income tax payments are due on each of the following dates EXCEPT: March 15. April 15. June 15. September 15.

March 15.

When a small stock dividend is declared and the market value exceeds the par or stated value of the shares, the excess of market value over par or stated value should be entered in which of the following accounts?

Paid-In Capital in Excess of Par.

The balance of the income summary account of a corporation is transferred to which of the following accounts?

Retained Earnings

Capital resulting from the retention of earnings should be entered in an account with an appropriate title such as

Retained Earnings.

When a stock dividend of less than 20−25% is declared and the market value exceeds the par or stated value of the shares, an amount equal to the market value of the shares to be distributed should be charged (debited) to which of the following accounts?

Stock Dividends

A corporation generally keeps and reinvests a portion of its net income instead of distributing it to its stockholders.

True

A statement of retained earnings is used to explain the change in the amount of retained earnings between two successive balance sheet dates.

True

A stock dividend may be distributed even if the company is short of cash.

True

A stock dividend will reduce the amount in the retained earnings section of stockholders' equity, while increasing the amount in the paid-in capital section.

True

A stock split requires no formal journal entry and may be recognized simply by a memorandum notation in the general journal and in the appropriate capital stock accounts.

True

An entry for a cash dividend is required both on the date of declaration and the date of payment.

True

An exchange of one share of an old issue of stock for a multiple number of shares of a new issue of stock with a reduced par or stated value is known as a stock split.

True

Appropriation of retained earnings has been used primarily to limit the availability of retained earnings for paying stockholders' dividends.

True

At year-end, an adjusting entry is necessary to recognize the correct amount of income taxes the corporation must pay for the year.

True

Cash dividends reduce both the retained earnings and the stockholders' equity in the corporation.

True

Corporate earnings that are not distributed to the stockholders are retained by the corporation to help finance the growth of the business.

True

Generally, a stock dividend is declared to improve the marketability of the shares by reducing the market price per share, increasing the number of shares outstanding, and making it possible to have a wider ownership of the stock.

True

If a balance sheet is prepared between the date of declaration and date of payment, dividends payable accounts are reported as current liabilities.

True

Most corporations must estimate their annual income taxes and make quarterly tax payments.

True

No dividend can be paid unless so declared by the board of directors.

True

Stock Dividends Distributable is reported as an addition to common stock in the stockholders' equity section of the balance sheet.

True

Three dates are involved in the declaration and payment of dividends-the date of declaration, the date of record, and the date of payment.

True

Unappropriated Retained Earnings will decrease because of net losses, declarations of cash or stock dividends, and appropriations.

True

The board of directors declared a $2 per share cash dividend on common stock and the corporation had 5,000 shares authorized and 4,000 shares outstanding and make a journal entry. The journal entry for the dividend payment would be

a debit to Cash Dividends Payable for $8,000 and a credit to Cash for $8,000.

The journal entry made on the date of declaration of a cash dividend to common stockholders includes

a debit to Cash Dividends and a credit to Common Dividends Payable

The board of directors declared a $2 per share cash dividend on common stock and the corporation had 5,000 shares authorized and 4,000 shares outstanding. The entry required to record the declaration of dividends would be

a debit to Cash Dividends and a credit to Common Dividends Payable.

After making four quarterly estimated payments of $3,500, a corporation's actual income tax liability for the year is $17,200. The year-end adjusting entry would require

a debit to Income Tax Expense for $3,200.

A resolution by the board of directors to set aside a part of the credit balance of the retained earnings account for a specific use is called

an appropriation.

The ____________________ is the date on which the board of directors declares that a dividend is to be paid.

date of declaration

The ____________________ is the date on which the dividend is actually paid by the corporation.

date of payment

The ____________________ is when the names of stockholders entitled to receive the dividend are determined.

date of record

All of the following statements concerning Retained Earnings are true EXCEPT: declaring cash dividends will decrease Retained Earnings. distributing stock dividends will decrease Retained Earnings. appropriating retained earnings will have no effect on total stockholders' equity. declaring a stock split will have no effect on Retained Earnings.

distributing stock dividends will decrease Retained Earnings.

Earnings retained in a corporation are recorded by closing the income summary account to the ____________________ account at the end of the period.

retained earnings

In a corporation, capital resulting from the retention of earnings is entered in the ____________________ account.

retained earnings

In a corporation, the capital resulting from the retention of earnings is entered in the

retained earnings account.

A restriction of retained earnings by the board of directors for a specific purpose is called a(n) ____________________.

retained earnings appropriation

A proportionate distribution of shares of a corporation's own stock to its stockholders is known as a(n) ____________________.

stock dividend

All of the following statements concerning appropriation of retained earnings are true EXCEPT: the practice of appropriating retained earnings is unusual today. stockholders generally expect all unappropriated retained earnings to be distributed in the form of dividends. it is necessary to advise balance sheet readers that retained earnings is not totally available for dividends. simply noting the restriction of retained earnings is not sufficient.

stockholders generally expect all unappropriated retained earnings to be distributed in the form of dividends.