Corporations: Paid-in Capital and the Balance Sheet

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

Characteristics • limited liability of stockholders • separation of ownership and management • corporate taxation • government regulation

Organizing a Corporation • Obtain charter from the state • Charter authorizes corporation to • issue stock • conduct business in accordance with state law and the corporation’s bylaws

Organizing a Corporation • Stockholders elect board of directors • Board • Sets policy • Appoints officers • Elects a chairperson

Authority Structure Stockholders Board of Directors Chairperson of the Board President Various Vice-Presidents and Secretary Controller Treasurer

Capital Stock • Corporate ownership - evidenced by a stock certificate • Total number of shares authorized is limited by charter

Stockholders’ Equity • Two components: • Paid-in capital • Retained earnings

Stockholders’ Equity On June 1, the Bloom’s Corporation issued stock valued at $10,000. Jun 1 Cash 10,000 Common stock 10,000 Issued stock for cash

Stockholders’ Equity Bloom’s Corporation net income for the year was $800,000. Dec 31 Income summary 800,000 Retained earnings 800,000 To close net income to retained earnings

Stockholders’ Rights • Vote • Dividends • Liquidation • Preemption

Classes of Stock • Common stock - most basic form of capital stock • Preferred stock - owners have certain advantages over common stockholders

Classes of Stock • Par value • No-par value • No-par, stated value

Objective 2 Record the issuance of stock.

Issuing Stock Example On January 13, Martin Corporation issues 100 shares of stock for $10 per share. a. Assume the stock had a $10 par value. Jan 13 Cash (100 shares @ $10) 1,000 Common Stock 1,000 Issued common stock at par

Issuing Stock Example Assume the shares had a par value of $1. Jan 13 Cash (100 shares @ $10) 1,000 Common Stock 100 Paid-in Capital in Excess of Par-common 900 Issued common stock at a premium

Issuing Stock Example Assume the stock had a $1 stated value. Jan 13 Cash (100 shares @ $10) 1,000 Common Stock 100 Paid-in Capital in Excess of Stated Value-common 900 Issued common stock at a premium

Issuing Stock Example Assume the shares were no-par, no stated value. Jan 13 Cash (100 shares @ $10) 1,000 Common Stock 1,000 Issued 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 Sep 11 Building 100,000 Common stock (15,000 x $1) 15,000 Paid-in capital in excess of par- common 85,000 Issued stock for a building

Preferred Stock Separate class of stock, typically having priority over common shares in . . • Dividend distributions • Distribution of assets in case of liquidation • Do not have voting rights

Preferred: Per Share Dividend Amount • Stated as percentage of par value or as specified amount • How much does one share of 3% preferred stock with a $100 par value receive when dividends are declared and paid? • How much does one share of $4 preferred stock with a $50 par value receives when dividends are declared and paid? $3 $4

Objective 3 Prepare the stockholders’ equity section of a corporation balance sheet. See page 516 for example.

Stockholders’ Equity • Paid-in capital + retained earnings = stockholders’ equity (ownership) in assets of the corporation • Paid-in capital comes from investments by stockholders • Retained earnings come from corporation’s customers

Objective 4 Account for cash dividends.

Dividend Dates • Corporation must declare dividend before paying it • Board of directors has authority to declare dividend

Entries for Cash Dividends Three important dates • Date of declaration . • Date of record • Date of payment

Entries for Cash Dividends On January 19, a $1 per share cash dividend is declared. There are 10,000 common shares outstanding to be paid on March 19 to stockholders on record on February 19. Date of declaration: Jan 19 Retained Earnings 10,000 Dividends Payable 10,000

On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. Date of record: Entries for Cash Dividends No Entry Required

Entries for Cash Dividends On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The date of payment: Mar 19 Dividends Payable 10,000 Cash 10,000

Cash Dividends Example Assume $50,000 dividends are declared. The company has • 6% Preferred stock, $100 par, 1,000 shares issued • Common stock, $10 par 25,000 shares issued

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%, $100 par value preferred shares Preferred dividend 6% × $100 ×10,000 = $60,000 Common shareholders receive nothing.

Cumulative and Noncumulative Preferred If preferred stock is • Cumulative - $10,000 shortage must be paid before any dividend is paid to common shareholders in future • Noncumulative - passed dividend is lost

Objective 5 Use different stock values in decision making.

Book Value per Share • Equity a stockholder has in the net assets of the corporation

Stock Values • Stock values in addition to par value • market value • book value

Stock Values Example 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 $200,000 Paid-in capital in excess of par–common 100,000 Total paid-in capital $300,000 Retained earnings 100,000 Total stockholders’ equity $400,000 Book value per share: $400,000 ÷ 10,000 = $40

Objective 7 Account for the income tax of a corporation.

Income Taxes Incometax expense = Income before income tax (from income statement) × Income tax rate Incometax payable = Taxable income (from the tax return filed with IRS) × Income tax rate

Income Taxes • Deferred tax liability = difference between income tax expense and income tax payable for any one year

Corporations: Paid-in Capital and the Balance Sheet