Corporations: Paid-in Capital and the Balance Sheet

1. Corporations: Paid-inCapital and the Balance Sheet Chapter 13

2. Identify the characteristics of a corporation. Objective 1

3. 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

4. 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.

5. 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.

6. Authority Structurein a Corporation Stockholders Board of Directors Chairperson of the Board President Various Vice-Presidents and Secretary Controller Treasurer

7. 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.

8. Stockholders’ Equity Owners’ equity in the corporation has two components: Paid-in capital Retained earnings

9. Stockholders’ Equity Example On June 1, the Bloom’s Corporation issued stock valued at $10,000. June 1 Cash 10,000 Common Stock 10,000 Issued stock

10. 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 incometo Retained Earnings

11. Stockholders’ Rights • The ownership of stock entitles stockholders to four basic rights, unless specific rights are withheld by agreement. • Vote • Dividends • Liquidation • Preemption

12. Classes of Stock • Common stock is the most basic form of capital stock. • Preferred stock gives its owners certain advantages over common stockholders.

13. 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.

14. 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.

15. Record the issuance of stock. Objective 2

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

17. Issuing Stock Example The shares were issued at par of $1. January 13 Cash (10,000 shares @ $1) 10,000 Common Stock 10,000 Issue common stock at par

18. 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 90,000 Issue common stock at a premium

19. Issuing Stock Example The $1 statedvalue 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 ofStated Value90,000 Issue common stock at a premium

20. Issuing Stock Example Assume the shares were no-par common stock. January 13 Cash (10,000 shares @ $10) 100,000 Common Stock 100,000 Issue no-par common stock

21. 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?

22. Issuing Stock Example September 11 Building 100,000 Common Stock (15,000 @ $1) 15,000 Paid-in Capital in Excess of Par ($100,000 – $15,000) 85,000 Issued common stock in exchange for a building

23. 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.

24. Prepare the stockholders’ equity section of a corporation’s balance sheet. Objective 3

25. Review of Accountingfor Paid-In Capital Stockholders’ Equity Paid-in Capital: Preferred stock, 5%, $100 par, 5,000 authorized, 400 shares issued $40,000 Paid-in capital in excess of par–preferred 14,000 Total paid-in capital, preferred stockholders $54,000

26. Review of Accountingfor Paid-In Capital Stockholders’ Equity Paid-in Capital: Common Stock, $10 par, 20,000 shares authorized, 4,500 issued $ 45,000 Paid-in capital in excess of par–common 72,000 Total paid-in capital $171,000 Retained earnings 85,000 Total stockholders’ equity $256,000

27. 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.

28. 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.

29. Dividend Dates • A corporation must declare a dividend before paying it. • The board of directors alone has the authority to declare a dividend.

30. Dividend Dates Three relevant dates for dividends are: Declaration date Date of record Payment date

31. Account for cash dividends. Objective 4

32. 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.

33. Cash Dividends Example April 1 Retained Earnings 60,000 Dividends Payable 60,000 Declared a cash dividend June 15 Dividends Payable 60,000 Cash 60,000 Paid a cash dividend

34. Cash Dividends Example $50,000 dividends declared Preferred stock, 6%, 1,000 shares, $100 par Common stock, 25,000 shares, $100 par

35. Cash Dividends Example Preferred dividend 6% × $100 ×1,000 = $6,000 Common dividend $50,000 – $6,000 = $44,000

36. 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.

37. Cumulative and NoncumulativePreferred • If the preferred 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.

38. Use different stock values in decision making. Objective 5

39. Stock Values • The business community refers to different stock values in addition to par value. • market value • liquidation value • book value • redemption value

40. Stock Values Example Book value per share = Total stockholders’ equity ÷ Total shares outstanding Book value preferred = (Liquidation value + Dividendsin arrears) ÷ Number of shares outstanding Book value common = (Stockholders’ equity – Amount allocated to preferred) ÷ Number of shares outstanding

41. 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

42. Stock Values Example Stockholders’ Equity Paid-in Capital: Preferred 6% stock, $100 par value, authorized 5,000 shares cumulative and nonparticipating, 2,000 shares issued and outstanding $200,000 Paid-in capital in excess of par–preferred 6,000 Total paid-in capital, preferred stockholders $206,000 Liquidation value = $210,000 Dividends in arrears = $12,000

43. Stock Values Example Book value per share preferred: ($210,000 + $12,000) ÷ 2,000 = $111.00 Book value per share common: ($606,000 – 222,000) ÷ 10,000 = $38.40

44. Evaluate a company’s return on assets and return on stockholders’ equity. Objective 6

45. 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.

46. 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.

47. Account for the income tax of a corporation. Objective 7

48. Accounting for Income Taxesby Corporations Incometaxexpense = Income before income tax (from the income statement) × Income tax rate Incometaxpayable = Taxable income (from the tax return filed with the IRS) × Income tax rate

49. 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.

50. End of Chapter 13