corporations: paid-in capital and the balance sheet

Corporations: Paid-inCapital and the Balance

Sheet

Chapter 13

Objective 1

Identify the Characteristics

of a Corporation.

Characteristics

– separate legal entity– continuous life and transferability of ownership– no mutual agency– limited liability of stockholders– separation of ownership and management– corporate taxation– government regulation

Organizing a Corporation

• The process of creating a corporation begins when the organizers (incorporators) obtain a charter from the state.

• The charter authorizes the corporation to issue stock and conduct business in accordance with state law and the corporation’s bylaws.

Organizing a Corporation

• Stockholders elect the board of directors.

• The board sets policy, appoints the officers, and elects a chairperson.

• The board also designates the president, who is the chief operating officer.

Authority Structurein a Corporation

Stockholders

Board of Directors

Chairperson of the Board

President

Various Vice-Presidents and Secretary

Controller Treasurer

Capital Stock

• Corporate ownership is evidenced by a stock certificate which may be for any number of shares.

• The total number of shares authorized is limited by charter.

Stockholders’ Equity

Paid-in capitalPaid-in capital

Retained earningsRetained earnings

Owners’ equity in the corporationhas two components:

Stockholders’ Equity Example

On June 1, the Bloom’s Corporationissued stock valued at $10,000.

June 1Cash 10,000

Common Stock 10,000Issued stock

Stockholders’ Equity Example

Bloom’s Corporation net incomefor the year was $800,000.

December 31Income Summary 800,000

Retained Earnings 800,000To close net income to Retained Earnings

Stockholders’ Rights

• The ownership of stock entitles stockholders to four basic rights, unless specific rights are withheld by agreement.

1 Vote

2 Dividends

3 Liquidation

4 Preemption

Classes of Stock

• Common stock is the most basic form of capital stock.

• Preferred stock gives its owners certain advantages over common stockholders.

Classes of Stock

• What is par value?

• It is an arbitrary amount assigned to a share of stock.

• Most companies set the par value of their common stock quite low to avoid legal difficulties from issuing their stock below par.

Classes of Stock

• No-par stock does not have a par value.

• Some have a stated value.

• Stated value is an arbitrary value assigned to a share of common stock.

• This is similar to par value.

Objective 2

Record the Issuance of Stock.

Issuing Stock Example

• On January 13, Martin Corporation, which manufactures skateboards, issues 10,000 shares of common stock for $10 per share.


The shares were issued at par of $1.

January 13Cash (10,000 shares @ $1) 10,000

Common Stock 10,000 Issue common stock at par


The shares were issued at a premium of $9 per share.


Common Stock 10,000Paid-in Capital inExcess of Par-common 90,000

Issue common stock at a premium


The $1 stated value shares wereissued at a premium of $9 per share.


Common Stock 10,000Paid-in Capital inExcess of Stated Value 90,000

Issue common stock at a premium


Assume the shares were no-par common stock.


Common Stock 100,000Issue no-par common stock


• On September 11, Martin Corporation issued 15,000 shares of its $1 par common stock for a building worth $100,000.

• What is the journal entry?


September 11Building 100,000

Common Stock (15,000 @ $1) 15,000Paid-in Capital in Excessof Par-common ($100,000 – $15,000) 85,000

Issued common stock in exchange for a building

Issuing Preferred Stock

• Accounting for preferred stock follows the pattern illustrated for common stock.

• Stockholders’ equity on the balance sheet lists preferred stock, common stock, and retained earnings – in that order.

Objective 3

Prepare the Stockholders’Equity Section of a

Corporation Balance Sheet.

Paid-in Capital:Preferred stock, 5%, $100 par,5,000 authorized, 400 shares issued $40,000Paid-in capital in excess of par–preferred 14,000Total paid-in capital, preferred stockholders $54,000

Review of Accountingfor Paid-In Capital


Paid-in Capital:Common Stock, $10 par, 20,000 sharesauthorized, 4,500 issued $ 45,000Paid-in capital in excess of par–common 72,000Total paid-in capital $171,000Retained earnings 85,000Total stockholders’ equity $256,000




• Paid-in capital and retained earnings represent the stockholders’ equity (ownership) in the assets of the corporation.

• Paid-in capital comes from the corporation’s stockholders who invested in the company.

• Retained earnings come from the corporation’s customers.


• Which is more permanent, paid-in capital or retained earnings?

• Paid-in capital is more permanent because corporations use their retained earnings for declaring dividends to the stockholders.

Dividend Dates

• A corporation must declare a dividend before paying it.

• The board of directors alone has the authority to declare a dividend.

Dividend Dates

Declaration date

Date of record Payment date

Three relevant dates for dividends are:

Objective 4

Account for Cash Dividends.

Cash Dividends Example

• On April 1, the board declares a dividend of $1 per share payable June 15 to stockholders of record on May 15.

• There are 60,000 shares outstanding.


June 15Dividends Payable 60,000

Cash 60,000Paid a cash dividend

April 1Retained Earnings 60,000

Dividends Payable 60,000Declared a cash dividend


Preferred stock, 6%, 1,000 shares, $100 par

Common stock, 25,000 shares, $100 par

$50,000 dividends declared


Preferred dividend6% × $100 ×1,000 = $6,000

Common dividend $50,000 – $6,000 = $44,000

Preferred dividend6% × $100 ×10,000 = $60,000

Suppose there were 10,000,6%, par value preferred shares

Common shareholders receive nothing.


Cumulative and NoncumulativePreferred

• If the preferred stock is cumulative, the $10,000 shortage must be paid before any dividend is paid to common shareholders.

• If noncumulative, a passed dividend is simply lost.

Objective 5

Use Different Stock Values

in Decision Making.

Stock Values

• The business community refers to different stock values in addition to par value.

– market value

– book value

Stock Values Example

Book value per share =Total stockholders’ equity ÷ Total shares outstanding

Book value common =(Stockholders’ equity – Amount allocated to preferred)

÷ Number of shares outstanding

Stock Values Example

Paid-in Capital:Common Stock, $20 par value, 10,000 sharesauthorized, issued, and outstanding $200,000Paid-in capital in excess of par–common 100,000Total paid-in capital $300,000Retained earnings 100,000Total stockholders’ equity $400,000

Book value per share: $400,000 ÷ 10,000 = $40


Objective 6

Evaluate Returnon Assets and Return

onStockholders’ Equity.

Return on Assets

Rate of return on total assets =(Net income plus Interest expense)

÷ Average total assets

It is a measure of a company’s ability to generate profits from the use of its assets.

Return on Equity

Rate of return on common stockholders’ equity =(Net income – Preferred dividends)

÷ Average common stockholders’ equity

It is a measure of the income earnedfrom the common stockholders’

investment in the company.

Objective 7

Account for the Income Tax

of a Corporation.

Accounting for Income Taxesby Corporations

Income tax expense =Income before income tax (from the income statement)

× Income tax rate

Income tax payable =Taxable income (from the tax return filed with the IRS)

× Income tax rate

Accounting for Income Taxesby Corporations

• Deferred tax liability is the difference between income tax expense and income tax payable for any one year.

• Revenues and expenses may be reported in different periods for income statement and tax return purposes.

• Alternative depreciation methods may be used for book and tax purposes.

End of Chapter 13

corporations: paid-in capital and the balance sheet

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