To demonstrate corporate accounting assume that five persons secured a

To demonstrate corporate accounting assume that five

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To demonstrate corporate accounting, assume that five persons secured a certificate of incorporation for a new corporation. Each invested $10,000 in the cor- poration by buying 1,000 of its common shares. The corporation's entry to record their investments is CORPORATE ACCOUNTING LO 7 Explain the nature of a corporation’s retained earnings and their rela- tionship to the declaration of dividends.
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208 Chapter 4 If during its first year the corporation earned $20,000, the entry to close its In- come Summary account is Jan. 5 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000.00 Common Shares . . . . . . . . . . . . . . . . . . . . . . . . 50,000.00 Issued 5,000 common shares for cash. Dec. 31 Income Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000.00 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . 20,000.00 To close the Income Summary account. If these are the only entries that affected the Common Shares and Retained Earnings accounts during the first year, the corporation s year-end balance sheet will show the shareholders equity as follows: Shareholders' Equity Share capital common: 5,000 shares outstanding . . $50,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 20,000 _______ Total shareholders equity . . . . . . . . . . . . . . . . . . $70,000 Because a corporation is a separate legal entity, the names of its shareholders usually are of little interest to a balance sheet reader and are not shown in the eq- uity section. However, in this case, the section does show that the net asset or eq- uity of the corporation is $70,000. Of this amount, $50,000 resulted from the is- suance of shares to the shareholders and $20,000 was the result of net income that has not been paid out as dividends. Perhaps the concept of retained earnings would be clearer if the balance sheet item were labeled Shareholders equity resulting from earnings. However, the re- tained earnings caption is commonly used; it does not represent a specific amount of cash or any other asset. These are shown in the asset section of the balance sheet. Retained earnings represent the shareholders equity resulting from earnings. To continue, assume that on January 10 of the corporation's second year, its board of directors met and by vote declared a $1 per share dividend payable on February 1 to the January 25 shareholders of record (shareholders according to the corporation s records). The entry to record the declaration of the dividend is as follows: Jan. 10 Cash Dividends Declared . . . . . . . . . . . . . . . . . . . . . 5,000.00 Common Dividend Payable . . . . . . . . . . . . . . . . 5,000.00 Declared a $1 per share dividend. LO 8 Prepare entries to record the declaration and pay- ment of a dividend and to close the temporary ac- counts of a corporation.
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