Corporations: Paid-inCapital and the Balance Sheet pot

Stockholders’ EquityPaid-in capital Retained earnings Owners’ equity in the corporation has two components:... Issuing Stock Example• On January 13, Martin Corporation, which manufacture

Corporations: Paid-in Capital and the Balance

Sheet

Chapter

13

Objective 1

Identify the Characteristics

of 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

• 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

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 capital

Retained earnings

Owners’ equity in the corporation

has two components:

Stockholders’ Equity Example

On June 1, the Bloom’s Corporation

issued stock valued at $10,000

June 1

Issued stock

Stockholders’ Equity Example

Bloom’s Corporation net income

for 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 Dividends

3 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

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

Issuing Stock Example

The shares were issued 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

Paid-in Capital in

Issuing Stock Example

Assume the shares were 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

Objective 3

Prepare the Stockholders’

Equity Section of a Corporation Balance Sheet.

Paid-in Capital:

Preferred stock, 5%, $100 par,

Review of Accounting

for Paid-In Capital

Stockholders’ Equity

Paid-in Capital:

Common Stock, $10 par, 20,000 shares

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

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

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 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 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 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 earnedfrom the common stockholders’

investment in the company

Objective 7

Account for the Income Tax

of a Corporation.

Accounting for Income Taxes

by 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 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

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