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CHAPTER 21 CORPORATIONS: TAXES, EARNINGS, DISTRIBUTIONS, AND THE RETAINED EARNINGS STATEMENT REVIEW QUESTIONS 1. Corporations incur income tax expense, but sole proprietorships and partnerships do not. 2. The two major sources of capital for every type of business are capital that results from investments by the owners and capital that results from earnings retained in the business. 3. Earnings are retained in the company to help finance the growth of the business. 4. The procedures for closing the income summary account for a corporation differ from a sole proprietorship because the balance of the income summary account of a corporation is transferred to the retained earnings account. If there is net income for a period, Income Summary is debited and Retained Earnings is credited. If there is a net loss for the period, the opposite entry is made. 5. The three dates involved in the declaration and payment of dividends are: a. date of declaration—the date on which the board of directors decides that a dividend is to be paid. b. date of record—the date on which the names of stockholders entitled to receive the dividend are determined. c. date of payment—the date on which the dividend is actually paid by the corporation. 6. Cash dividends reduce the stockholders’ equity in the corporation—specifically the retained earnings account. 7. A corporation may distribute a stock dividend for the following reasons: a. The company may be short of cash. b. The company may want to increase the marketability of its shares by lowering the price per share. c. The corporation may want to transfer a portion of retained earnings to a paid-in capital category to indicate that it is unavailable for dividends. 8. Stock dividends distributable is reported as an addition to common stock in the stockholders’ equity section of the balance sheet. Stock dividends distributable is not a liability since no assets or services are owed. 9. Stock dividends do not affect assets, liabilities, or total stockholders’ equity of the corporation. Stock dividends merely transfer part of the balance of the retained earnings account to one or more paid-in capital accounts. A stock split has no effect on the accounts of a corporation. 10.
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