Corporations: Paid-in Capital and the Balance Sheet pot

Corporations: Paid-inCapital and the Balance

Chapter 13

Objective 1

Identify the Characteristicsof a Corporation.

– 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

• 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

StockholdersBoard of Directors

Chairperson of the BoardPresident

Various Vice-Presidents and Secretary

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 Example

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

Issued stock

Stockholders’ Equity Example

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

Stockholders’ Rights

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

1 Vote

2 Dividends3 Liquidation

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.

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.

Issuing Stock Example

The shares were issued at par of $1.

Issuing Stock Example

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

Issuing Stock Example

The $1 stated value shares were

issued at a premium of $9 per share.January 13

Cash (10,000 shares @ $10) 100,000

Paid-in Capital in

Issuing Stock Example

Assume the shares were no-par common stock.January 13

Cash (10,000 shares @ $10) 100,000

Issue no-par common stock

Issuing Stock Example

• 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?

Issuing Stock Example

September 11

Common Stock (15,000 @ $1) 15,000Paid-in Capital in Excess

of Par-common ($100,000 – $15,000) 85,000Issued 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.

Paid-in Capital:

Preferred stock, 5%, $100 par,

Review of Accountingfor Paid-In Capital

Stockholders’ Equity

Paid-in Capital:

Common Stock, $10 par, 20,000 shares

Review of Accountingfor Paid-In Capital

Stockholders’ Equity

Review of Accountingfor Paid-In Capital

• 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.

Review of Accountingfor Paid-In Capital

• 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

Declaration date

Date of record Payment dateThree 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.

Cash Dividends Example

June 15

Dividends Payable 60,000April 1

Retained Earnings 60,000

Dividends Payable 60,000Declared a cash dividend

Cash Dividends Example

Preferred stock, 6%, 1,000 shares, $100 parCommon stock, 25,000 shares, $100 par

$50,000 dividends declared

Cash Dividends Example

Preferred dividend

6% × $100 ×1,000 = $6,000

Common dividend

$50,000 – $6,000 = $44,000

Preferred dividend

6% × $100 ×10,000 = $60,000

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

Common shareholders receive nothing.

Cash Dividends Example

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 Valuesin Decision Making.

Stock Values

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

– market value– book value

Stock Values Example

Total stockholders’ equity ÷ Total shares outstanding

(Stockholders’ equity – Amount allocated to preferred)

÷ Number of shares outstanding

Stock Values Example

Paid-in Capital:

Common Stock, $20 par value, 10,000 shares

Stockholders’ Equity

Objective 6

Evaluate Return

on 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.

Objective 7

Account for the Income Taxof a Corporation.

Accounting for Income Taxesby Corporations

Income before income tax (from the income statement)

× Income tax rate

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