Corporations Paidin Capital and the Balance Sheet Chapter
Corporations: Paid-in Capital 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 Structure in 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 Owners’ equity in the corporation has two components: Paid-in capital Retained earnings
Stockholders’ Equity Example On June 1, the Bloom’s Corporation issued stock valued at $10, 000. June 1 Cash Common Stock Issued stock 10, 000
Stockholders’ Equity Example Bloom’s Corporation net income for the year was $800, 000. December 31 Income Summary 800, 000 Retained Earnings 800, 000 To 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.
Issuing Stock Example The shares were issued at par of $1. January 13 Cash (10, 000 shares @ $1) 10, 000 Common Stock Issue common stock at par 10, 000
Issuing Stock Example The shares were issued at a premium of $9 per share. January 13 Cash (10, 000 shares @ $10) 100, 000 Common Stock 10, 000 Paid-in Capital in Excess of Par-common 90, 000 Issue common stock at a premium
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 Common Stock 10, 000 Paid-in Capital in Excess of Stated Value 90, 000 Issue common stock at a premium
Issuing Stock Example Assume the shares were no-par common stock. January 13 Cash (10, 000 shares @ $10) Common Stock Issue no-par common stock 100, 000
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 Building 100, 000 Common Stock (15, 000 @ $1) 15, 000 Paid-in Capital in Excess of 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.
Review of Accounting for Paid-In Capital Stockholders’ Equity Paid-in Capital: Preferred stock, 5%, $100 par, 5, 000 authorized, 400 shares issued Paid-in capital in excess of par–preferred Total paid-in capital, preferred stockholders $40, 000 14, 000 $54, 000
Review of Accounting for Paid-In Capital Stockholders’ Equity Paid-in Capital: Common Stock, $10 par, 20, 000 shares authorized, 4, 500 issued Paid-in capital in excess of par–common Total paid-in capital Retained earnings Total stockholders’ equity $ 45, 000 72, 000 $171, 000 85, 000 $256, 000
Review of Accounting for 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 Accounting for 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 • A corporation must declare a dividend before paying it. • The board of directors alone has the authority to declare a dividend.
Dividend Dates Three relevant dates for dividends are: Declaration date Date of record Payment date
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 April 1 Retained Earnings 60, 000 Dividends Payable Declared a cash dividend June 15 Dividends Payable Cash Paid a cash dividend 60, 000
Cash Dividends Example $50, 000 dividends declared Preferred stock, 6%, 1, 000 shares, $100 par Common stock, 25, 000 shares, $100 par
Cash Dividends Example Preferred dividend 6% × $100 × 1, 000 = $6, 000 Common dividend $50, 000 – $6, 000 = $44, 000
Cash Dividends Example Suppose there were 10, 000, 6%, par value preferred shares Preferred dividend 6% × $100 × 10, 000 = $60, 000 Common shareholders receive nothing.
Cumulative and Noncumulative Preferred • 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 Stockholders’ Equity Paid-in Capital: Common Stock, $20 par value, 10, 000 shares authorized, issued, and outstanding Paid-in capital in excess of par–common Total paid-in capital Retained earnings Total stockholders’ equity $200, 000 100, 000 $300, 000 100, 000 $400, 000 Book value per share: $400, 000 ÷ 10, 000 = $40
Objective 6 Evaluate Return on Assets and Return on Stockholders’ 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 earned from the common stockholders’ investment in the company.
Objective 7 Account for the Income Tax of a Corporation.
Accounting for Income Taxes by 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 Taxes by 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
- Slides: 48