13-1 c orporations : p aid-in c apital, r etained e arnings, d ividends, and t reasury s tock...
TRANSCRIPT
13-1
CORPORATIONS: PAID-IN CAPITAL, RETAINED EARNINGS, DIVIDENDS,
AND TREASURY STOCK
CHAPTER 13CHAPTER 13
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Paid-in (Contributed) CapitalPaid-in (Contributed) CapitalRefers to all capital contributedcontributed to a
corporation. Sources are:
Sale of Stock Stock Dividends
Treasury Stock Donated Capital
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Retained EarningsRetained Earnings
DefinitionNet earnings (profits less losses) since
the inception of the corporation less dividends paid since inception.
Normal Balance? Credit
Debit Balance is called?“Deficit”
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Partial Balance SheetStockholders' Equity:Paid-in Capital: Preferred Stock-6%, $100 par value; authorized, issued, and outstanding 4,000 shares 400,000$ Common Stock-no par value; $5 stated value; authorized, issued, and outstanding 400,000 shares 2,000,000 2,400,000$ Paid-in Capital- From Preferred Stock 40,000$ From Common Stock 10,000 50,000 Total Paid-in Capital 2,450,000$ Retained Earnings 500,000 Total Stockholders' Equity 2,950,000$
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DividendsDividends
Distributions of earnings to
stockholders
Not legally required
Liability created at declaration
Declared by board of directors
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Types of dividend distributions: Cash (the norm) Stock (infrequent)
Both types of dividends require the Retained Earnings credit balance be > or = to the amount to be distributed
Cash dividends require sufficient cash to pay the dividend
Dividend dates for both types Date of declaration Date of record Date of payment
DividendsDividends
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Cash DividendsCash Dividends Date of Declaration
Board of directors declares the dividend Corp. records a liability
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Cash DividendsCash Dividends Date of Record
Stockholders owing shares on this date will receive the dividend
No entry is made!
X
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Cash DividendsCash Dividends Date of Payment
Cash paid to stockholders Corp. records the payment
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Cash DividendsCash DividendsQuestionQuestion
On June 1, 1999 a corporation’s board of directors declared a dividend for the 2,500 shares
of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
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Cash DividendsCash DividendsQuestionQuestion
On June 1, 1999 a corporation’s board of directors declared a dividend for the 2,500 shares
of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
July 15 is the date of payment. On this date, the corporation would debit Dividends Payable and credit Cash for $20,000.
$100 × 8% = $8 dividend per share
$8 × 2,500 = $20,000 total dividend
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Stock DividendsStock Dividends
Distributions of additional shares of stock to stockholders
Why issue a stock dividend? Corporation may be low on cash so can’t
issue a cash dividend
To decrease market price of stock
Know complete list of 4 reasons on p. 469
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Stock DividendsStock Dividends
Effect on Stockholders Receive a percentage increase in the
number of shares they own. e.g., with a 10% stock dividend, if you own
100 shares, you get 10 additional shares
Effect on Corporation No change in total
stockholders’ equity No change in par values
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Stock DividendsStock Dividends
Recorded by transferring an amount from the retained earnings section of the balance sheet to the paid-in capital
section
(i.e., from the “temporary” part of stockholders’ equity to the
“permanent” part)
This is known as “capitalizing” retained earnings
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Balance Sheet PresentationBalance Sheet Presentation
Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding 1,000,000$ Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding 400,000
Total Paid-in Capital 1,400,000$Retained Earnings 300,000
Total Stockholders' Equity 1,700,000$
Stockholders’ Equity:
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Small Stock DividendsSmall Stock Dividends
Record at current market value of stock
Record at current market value of stock
Stock dividend < 20% to 25%Stock dividend < 20% to 25%
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Large Stock DividendsLarge Stock Dividends
Record at par or stated value of stock
Record at par or stated value of stock
Stock dividend > 20% to 25%Stock dividend > 20% to 25%
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Small Stock Dividend ExampleSmall Stock Dividend ExamplePrepare the journal entries to record the following
stock dividend.
On March 1, 1999, Beachfront Condos, Inc. issued a 15% stock dividend. Beachfront has 3,000
shares of $50 par value common stock outstanding. The market price of the stock just prior to the stock dividend announcement was
$125 per share.
On April 15, 1999, Beachfront Condos, Inc. distributes the stock dividend.
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Small Stock Dividend ExampleSmall Stock Dividend ExampleDeclaration EntryDeclaration Entry
GENERAL JOURNAL Page 34
Date DescriptionPost. Ref. Debit Credit
Mar. 1 Retained Earnings (Market) 56,250
Stock Dividend Distributable (Par) 22,500
Paid-in Capital-Stock Dividend (Plug) 33,750
To record stock dividend declaration
3,000 × 15% = 450 shares
450 × $125 mkt. = $56,250
450 × $50 par = $22,500
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Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding 1,000,000$ Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding 400,000 Paid-in Capital in excess of Par Value
Preferred Stock 100,000$ Common Stock 80,000 180,000
Total Paid-in Capital 1,580,000$Retained Earnings 300,000
Total Stockholders' Equity 1,880,000$
Balance Sheet PresentationBalance Sheet Presentation(BEFORE TRANSFER)(BEFORE TRANSFER)
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Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding 1,000,000$ Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding 400,000
Stock dividend distributable 22,500 Paid-in Capital in excess of par Preferred Stock 100,000$ Common Stock 80,000 Stock dividend 33,750 213,750
Total Paid-in Capital 1,636,250$Retained Earnings 243,750
Total Stockholders' Equity 1,880,000$
Balance Sheet PresentationBalance Sheet Presentation (AFTER TRANSFER - similar to p. 477)(AFTER TRANSFER - similar to p. 477)
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Small Stock Dividend ExampleSmall Stock Dividend ExampleDistribution EntryDistribution Entry
GENERAL JOURNAL Page 34
Date DescriptionPost. Ref. Debit Credit
Apr. 15 Stock Dividend Distributable 22,500
Common Stock 22,500
To record stock dividend distribution
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Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding 1,000,000$ Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding 422,500
Stock dividend distributable - Paid-in Capital in excess of par Preferred Stock 100,000$ Common Stock 80,000 Stock dividend 33,750 213,750
Total Paid-in Capital 1,636,250$Retained Earnings 243,750
Total Stockholders' Equity 1,880,000$
Balance Sheet PresentationBalance Sheet Presentation(AFTER DISTRIBUTION)(AFTER DISTRIBUTION)
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Large Stock DividendLarge Stock DividendExampleExample
Now assume that instead of a 15% stock dividend, Beachfront Condos, Inc. issued a 50% stock
dividend.
Prepare the journal entries for March 1 and April 15.
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Large Stock DividendLarge Stock DividendExampleExample
3,000 × 50% = 1,500 shares
1,500 × $50 par = $75,000
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Large Stock DividendLarge Stock DividendExampleExample
13-27
Stock SplitsStock Splits
Distributions of 100% or more
of stock to stockholders
Ice Cream Parlor
Banana Splits On Sale Now
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Stock SplitsStock Splits
Decrease par value of stock
Increase number of outstanding shares
No change in stockholders’ equity - not even in the composition
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[January 29, 1997]
Stock Splits - Real World ExamplesStock Splits - Real World Examples
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Stock SplitStock SplitAssume that a corporation had 5,000 shares of $1 par value common stock outstanding
before a 2–for–1 stock split.
Before Split
After Split
Common Stock Shares 5,000
Par Value per Share 1.00$
Total Par Value 5,000$
13-31
Stock SplitStock SplitAssume that a corporation had 5,000 shares of $1 par value common stock outstanding
before a 2–for–1 stock split.
Increase
Decrease
No Change
Before Split
After Split
Common Stock Shares 5,000 10,000
Par Value per Share 1.00$ 0.50$
Total Par Value 5,000$ 5,000$
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Stock SplitStock SplitAnother ExampleAnother Example
XYZ corporation had 5,000 shares of $60 par value common stock outstanding before a 2-for-1 stock
split.
Prepare the journal entry to record the stock split.
GENERAL JOURNAL Page 34
Date DescriptionPost. Ref. Debit Credit
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XYZ corporation had 5,000 shares of $60 par value common stock outstanding before a 2-for-1 stock
split.
Prepare the journal entry to record the stock split.
GENERAL JOURNAL Page 34
Date DescriptionPost. Ref. Debit Credit
Common Stock-$60 par 300,000
Common Stock-$30 par 300,000
To record 2 for 1 stock split
Stock SplitStock SplitAnother ExampleAnother Example
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GENERAL JOURNAL Page 34
Date DescriptionPost. Ref. Debit Credit
Common Stock-$60 par 300,000
Common Stock-$30 par 300,000
To record 2 for 1 stock split
XYZ corporation had 5,000 shares of $60 par value common stock outstanding before a 2-for-1 stock
split.
Prepare the journal entry to record the stock split.
Before Split
After Split
Common Stock Shares 5,000 10,000
Par Value per Share 60.00$ 30.00$
Total Par Value 300,000$ 300,000$
Stock SplitStock SplitAnother ExampleAnother Example
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Summary of Effects of Stock Summary of Effects of Stock Dividends and Stock SplitsDividends and Stock Splits
Effect on:
Small Stock
Dividend
Large Stock
Dividend
Stock Splits
Total Stockholders'
EquityNo Effect No Effect No Effect
Common Stock
Increases Increases No Effect
Other Paid-in Capital
Increases No Effect No Effect
Retained Earnings
Decreases Decreases No Effect
Number of Shares
OutstandingIncreases Increases Increases
Par Value per Share
No Effect No Effect Decreases
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Retained Earnings Retained Earnings Appropriations Appropriations
GENERAL JOURNAL Page 34
Date DescriptionPost. Ref. Debit Credit
Retained Earnings - Unappropriated XXXX
Retained Earnings- Appropriated XXXX
Contractual or voluntary restrictions on retained earnings available for dividends Simply splits one amount into two amounts!! Does not change total retained earnings
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Statement of Retained EarningsStatement of Retained Earnings
One of the four basic financial statements
Summarizes changes in retained earnings for the period
Net Income (+)
Net Losses (-)
Dividends (-)
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R/E - Beginning of Period $ $$$
Add: Net Income for for the Period $$$
Subtract: Dividends for the Period $$$
R/E - End of Period $ $$$
Simple Format: (p. 20)
Complex Format: (p. 474)Not responsible for it!
Statement of Retained EarningsStatement of Retained Earnings
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Treasury StockTreasury Stock
Repurchased shares of a corporation’s own stock.
Why reacquire own stock? To reduce ownership To reissue later at a higher market
price To increase earnings per share To use in employee stock option
programsThis list is in 2nd par. on p. 475
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Treasury StockTreasury Stock
Repurchased shares of a corporation’s own stock.
Considered issued but not outstanding stock
Has no voting rights Has no dividend rights Reduces stockholders’ equity
on the Balance SheetSee bottom of Illustration 13.7 on p. 477 for typical B/S presentation
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Treasury StockTreasury Stock
Acquisition of Treasury Stock is recorded at cost to reacquire the stock.
GENERAL JOURNAL Page 78
Date DescriptionPost. Ref. Debit Credit
Treasury Stock XXXX
Common Stock-$30 parCash XXXX
(Cost)
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Treasury StockTreasury Stock
At reissuance of the treasury shares, Treasury Stock is credited at cost.
GENERAL JOURNAL Page 78
Date DescriptionPost. Ref. Debit Credit
Cash XXXX
Common Stock-$30 parTreasury Stock XXXX
Paid-in Capital-Treasury Stock XXXX
(Cost)
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Nature of Treasury Stock account Contra Stockholders’ Equity account Shown last in Stockholders’ Equity section
of the Balance Sheet as a deduction Is not an asset account
Sale of Treasury Stock “Gain” is credited to Paid-in Capital-Treasury
Stock Transactions, a new account for us “Loss” is debited to Paid-in Capital-Treasury
Stock Transactions (as long as it does not force this account into a debit balance)
Treasury StockTreasury Stock
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On May 1, 1997 Photo Inc. reacquired 3,000 shares of its common stock at $55 per share.
Prepare the journal entry.
Treasury StockTreasury StockExampleExample
GENERAL JOURNAL Page 78
Date DescriptionPost. Ref. Debit Credit
13-45
On May 1, 1997 Photo Inc. reacquired 3,000 shares of its common stock at $55 per share.
Prepare the journal entry.
Treasury StockTreasury StockExampleExample
GENERAL JOURNAL Page 78
Date DescriptionPost. Ref. Debit Credit
May 1 Treasury Stock 165,000
Common Stock-$30 parCash 165,000
To record repurchase of stock
3,000 × $55 = $165,000
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On December 3, 1999 Photo Inc. reissued 1,000 shares of the stock at $75 per share.
Prepare the journal entry.
Treasury StockTreasury StockExampleExample
GENERAL JOURNAL Page 78
Date DescriptionPost. Ref. Debit Credit
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On December 3, 1999 Photo Inc. reissued 1,000 shares of the stock at $75 per share.
Prepare the journal entry.
Treasury StockTreasury StockExampleExample
GENERAL JOURNAL Page 78
Date DescriptionPost. Ref. Debit Credit
Dec. 3 Cash 75,000
Treasury Stock 55,000
Paid-in Capital-Treasury Stock 20,000
To record stock reissuance
1,000 × $75 = $75,000
1,000 × $55 = $55,000
$75,000 – $55,000 = $20,000
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Net Income Inclusions and Net Income Inclusions and ExclusionsExclusions
Let’s review the income
statement as we currently
know it.
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13-50
Net Income Inclusions and Net Income Inclusions and ExclusionsExclusions
Now, let’s see how some
“weird” items will affect the
financial statements.
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Rest of Chapter -Rest of Chapter -4 “Weird” Reporting Situations4 “Weird” Reporting Situations
Extraordinary Items
Discontinued Operations
Cumulative Effect of a Change in Accounting Principles
Prior Period Adjustments
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Income StatementIncome Statement(Top part of ILL. 13.8, p. 479)(Top part of ILL. 13.8, p. 479)
“THE LINE”
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3 Weird Items Shown Below 3 Weird Items Shown Below “The Line” on Income Statement“The Line” on Income Statement
Discontinued Operations
Extraordinary Items
Cumulative Effect of a Change in Accounting Principles
Note: All are shown net of tax effectsnet of tax effects
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Discontinued OperationsDiscontinued Operations
Sale or abandonment of a segment of a business
Sale or abandonment of a segment of a business
e.g., Product Line, Division, Subsidiarye.g., Product Line, Division, Subsidiary
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Must account for two items Profit or loss on the discontinued segment
for the period up to the point of sale Gain or loss on the disposal of the
discontinued segment itself
Remember Both of these must be shown net of any tax
effect
Discontinued OperationsDiscontinued Operations
13-56
Discontinued OperationsDiscontinued OperationsExampleExample
During the year, Gifts Etc. sold an unprofitable segment of the company. The
segment had a net loss for the period of $150,000 and was sold for a gain of
$100,000. All items are taxed at 30%.
How will this appear on Gifts Etc.’s income statement illustrated earlier on slide #49?
13-57
Discontinued OperationsDiscontinued OperationsCalculationsCalculations
Loss on Segment Operations* (150,000)$ Add: Tax Benefit ($150,000 × 30%) 45,000
Net Loss (105,000)$
Gain on Segment Disposal 100,000$ Less: Tax Expense ($100,000 × 30%) (30,000)
Net Gain 70,000$
*Up to point of sale
13-58
Discontinued OperationsDiscontinued OperationsIncome StatementIncome Statement
Income before Discontinued Operations 81,000$ * Discontinued Operations:Loss on Operations (net of $45,000 tax benefit) (105,000)$ Gain on Disposal (net of $30,000 tax expense) 70,000 (35,000)
* Previously shown as “Net Income” on income statement on slide #49
13-59
Extraordinary ItemsExtraordinary Items
Unusual Infrequent
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Two criteria, both of which must be met:
1. Unusual in nature andand
2. Infrequent in occurrence, given the environment in which the company exists
Note, however, that the FASB dictated that gains or losses on early extinguishment (i.e., retirement) of debt must also be reported as extraordinary, even though the above criteria may not be met.
Extraordinary ItemsExtraordinary Items
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Extraordinary ItemsExtraordinary ItemsExampleExample
During the year, Gifts Etc. experienced an extraordinary loss of $75,000 due to an
earthquake. All items are subject to a 30% tax rate.
How would this item appear on Gifts Etc.’s income statement?
13-62
Extraordinary ItemsExtraordinary ItemsCalculationCalculation
Earthquake Loss (75,000)$ Tax Benefit/Savings ($75,000 × 30%) 22,500
Net Loss (52,500)$
13-63
Extraordinary ItemsExtraordinary ItemsIncome StatementIncome Statement
Income before Discontinued Operations 81,000$ Discontinued Operations:Loss on Operations (net of $45,000 tax benefit) (105,000)$ Gain on Disposal (net of $30,000 tax expense) 70,000 (35,000) Extraordinary Items:Earthquake Loss (net of $22,500 tax benefit) (52,500)
13-64
Extraordinary ItemsExtraordinary ItemsAlternative Calculation of Tax Alternative Calculation of Tax SavingsSavings
Tax Liability Calculation:
Income before taxes $500,000 $500,000
Extraordinary Earthquake Loss (75,000) 0 .
Taxable Income 425,000 500,000
Tax Rate 30% 30% .
Tax Liability $127,500 $150,000
Difference due to tax benefit (i.e., savings) of extraord. loss $22,500
Gifts Etc. has Lucky Inc. Extraord. Loss Has No Loss
Therefore, the loss (net of tax savings) is only 52,500 (75,000 - 22,500) as shown on the previous slides.
13-65
Change to
Change in Accounting PrinciplesChange in Accounting Principles
New GAAP Method
Old GAAP Method
Occurs when changing from one GAAP to another GAAP
Examples Double-declining-balance method to
Straight-line method of depreciation Percentage-of-Sales to Percentage-of-
Receivables for Uncollectible Accounts
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Fact that a change occurred must be disclosed in notes to financial statements
Cumulative effect of change must be shown on income statement
i.e., the change must be reflected on the financial statements as if the company had always been using the new method
Change in Accounting PrinciplesChange in Accounting Principles
13-67
Change in Accounting PrinciplesChange in Accounting PrinciplesExampleExample
During the year, Gifts Etc. decided to change from the double-declining-balance
method to the straight-line method for depreciation. The net effect of this change is an increase in net income of $65,000. All
items are subject to a 30% tax rate.
How would this item appear on Gifts Etc.’s income statement?
13-68
Change in Accounting PrinciplesChange in Accounting PrinciplesCalculationCalculation
Increase in Net Income 65,000$ Less: Tax Expense ($65,000 × 30%) (19,500)
Net Increase 45,500$
13-69
Change in Accounting PrinciplesChange in Accounting PrinciplesIncome StatementIncome Statement
13-70
Prior Period AdjustmentsPrior Period Adjustments
Appear on the Statement of Retained Earnings as an adjustment to beginning
retained earnings balance
Corrections of errors from a previous period
13-71
Only two situations qualify as prior period adjustments Misapplications of GAAP Mathematical mistakes
Must be shown net of income tax effects Do corrections have to be made for bad
estimates in prior years?
Prior Period AdjustmentsPrior Period Adjustments
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Prior Period AdjustmentsPrior Period AdjustmentsExampleExample
While reviewing the depreciation entries for 1995-1998, the controller found that in 1997
depreciation expense was incorrectly debited for $150,000 when in fact it should have been debited $125,000. All items are
taxed at 30%.
Prepare the necessary journal entry in 1998 to correct this prior period error.
13-73
Prior Period AdjustmentsPrior Period AdjustmentsExampleExample
To correct this entry, can we just reverse it?
Why or why not?
GENERAL JOURNAL Page 78
Date DescriptionPost. Ref. Debit Credit
1997 Entry Made:
Depreciation Expense 150,000
Accumulated Depreciation 150,000
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Prior Period AdjustmentsPrior Period AdjustmentsExampleExample
GENERAL JOURNAL Page 98
Date DescriptionPost. Ref. Debit Credit
1998 Correcting Entry:
Accumulated Depreciation 25,000
We can debit Accumulated Depreciation since it is a permanent account.
13-75
Prior Period AdjustmentsPrior Period AdjustmentsExampleExample
GENERAL JOURNAL Page 98
Date DescriptionPost. Ref. Debit Credit
1998 Correcting Entry:
Accumulated Depreciation 25,000
Retained Earnings
However, we can’t credit Depreciation Expense since it
was closed to Income Summary and then to Retained Earnings.
13-76
Prior Period AdjustmentsPrior Period AdjustmentsExampleExample
GENERAL JOURNAL Page 98
Date DescriptionPost. Ref. Debit Credit
1998 Correcting Entry:
Accumulated Depreciation 25,000
Federal Income Taxes 7,500
Retained Earnings 17,500
Remember to consider the tax effects:$25,000 × 30% = $7,500 taxes payable
13-77
Earnings Per (Common) ShareEarnings Per (Common) Share Is one of the “gods” of the stock market Calculated only for common stock Calculated for each major item on the
income statement Income from Continuing Operations Discontinued Operations Extraordinary Items Cumulative Effect of a Change in Accounting
Principle Net Income
(See bottom of ILL. 13.8, p. 478)
13-78
Calculated as Net Income - Dividends to Preferred Stockholders
Average Number of CommonCommon Shares Outstanding
Pronouncements were 17 & 100 pages...
Earnings Per (Common) ShareEarnings Per (Common) Share
13-79
YOURS...OH NO!
WHOSE IDEA WAS THIS?