Copyright © 2007 Prentice-Hall. All rights reserved 1 Corporations: Paid-in Capital and the Balance Sheet Chapter 13

Copyright © 2007 Prentice-Hall. All rights reserved 1

Corporations: Paid-in Capital Corporations: Paid-in Capital and the Balance Sheetand the Balance Sheet

Corporations: Paid-in Capital Corporations: Paid-in Capital and the Balance Sheetand the Balance Sheet

Chapter 13


Objective 1Objective 1Objective 1Objective 1

Identify the characteristics of a corporation


CharacteristicsCharacteristicsCharacteristicsCharacteristics

• Separate legal entity from the owners (stockholders) - formed under laws of a particular state

• Continuous life and transferability of ownership - ownership divided into shares of stock that can be transferred to another

• No mutual agency - owners can not act as agents of the business

• Limited liability of stockholders - stockholders are not responsible for the debts of the corporation


CharacteristicsCharacteristicsCharacteristicsCharacteristics

• Separation of ownership and management - board of directors appoints officers to manage the business

• Corporate taxation - corporation pays franchise tax, federal and state income taxes

• Government regulation


Organizing a CorporationOrganizing a CorporationOrganizing a CorporationOrganizing a Corporation

• Incorporators 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 CorporationOrganizing a CorporationOrganizing a CorporationOrganizing a Corporation

• Stockholders elect board of directors

• Board – Sets policy – Appoints officers – Elects a chairperson


Capital StockCapital StockCapital StockCapital Stock

• Corporate ownership - evidenced by a stock certificate

• Total number of shares authorized is limited by charter


Stockholders’ EquityStockholders’ Equity

• Two components:– Paid-in capital– Retained earnings



Sole-proprietor Corporation

Owner, CapitalInvestmentsNet Income

Paid in CapitalInvestments

Retained Earnings

Net Income

Withdrawals

Dividends

Separate investments by owners (stockholders) and

the earnings of the company into 2 sections of

stockholders’ equity



Issue stockGENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Cash XXXX

Common Stock XXXX



Close income summary

GENERAL JOURNAL


Income Summary XXXX

Retained Earnings XXXX


Stockholders’ RightsStockholders’ RightsStockholders’ RightsStockholders’ Rights

• Four basic rights– Vote– Dividends– Liquidation– Preemption


Classes of StockClasses of StockClasses of StockClasses of Stock

• Common stock - most basic form of capital stock

• Preferred stock - owners have certain advantages over common stockholders– Receive dividends before common– Upon liquidation, receive assets before

common– Right to vote sometimes withheld


Classes of StockClasses of StockClasses of StockClasses of Stock

• Par value

• No-par value



Record the issuance of stock


Issuing StockIssuing StockIssuing StockIssuing Stock

Paid-in Capital

Common Stock

Par

Paid-in Capital in Excess of Par

Amount received over par

CashAmountreceived


GENERAL JOURNAL


Issuing StockIssuing StockIssuing StockIssuing Stock

On June 2, Mustang Properties issued 1,000 shares of $1 par common stock for cash of $1 per share

Jun2 Cash 1,000Common Stock 1,000

(1,000 shares x $1)


E13-14E13-14E13-14E13-14GENERAL JOURNAL


Jun19 Cash 8,000Common Stock 1,000Paid-in Capital in Excess of Par-common 7,000

Just the par value goes to the Common Stock account. Everything else goes to the Paid in Capital in Excess





Jun19 Cash 8,000Common Stock 1,000Paid-in Capital in Excess of Stated-common 7,000

What if this stock was no par stock with a stated value of $1? How would the entry be different?





Jun19 Cash 8,000Common Stock 8,000

What if this stock was true no par stock? How would the entry be different?

Note: All of the proceeds from the sale of stock becomes part of legal capital




Jul3 Cash 15,000Preferred Stock 15,000

This is no par stock, so the entire proceeds are

credited to the Preferred Stock account




Jul11 Equipment 20,000Common Stock 3,000Paid-in Capital in Excess ofPar – Common 17,000

When you issue stock for a noncash asset, debit the asset for its fair market value


E13-14 (2)E13-14 (2)E13-14 (2)E13-14 (2)Paid-in Capital

Preferred Stock

Paid-in Capitalin Excess

of Par, CommonCommon Stock1,000 7,00015,0003,000 17,0004,000 24,000

Total Paid-in Capital = $43,000Total Paid-in Capital = $43,000



Prepare the stockholders’ equity section of a corporation balance sheet


GENERAL JOURNAL


E13-17E13-17E13-17E13-17

Aug 6 Cash 13,000Common Stock 500Paid in Capital in Excess of Par, Common 12,500

12 Cash 20,000Preferred Stock 20,000

14 Land 26,000Common Stock 1,000Paid in Capital in Excess of Par, Common 25,000


GENERAL JOURNAL


E13-17E13-17E13-17E13-17

Aug 31 Income summary 40,000

Retained earnings 40,000


E13-17E13-17E13-17E13-17Stockholders’ EquityPaid-in capital:Preferred stock, $3, no-par, 100,000

authorized, 300 issued………………. $20,000Common stock, $1 par, 500,000

authorized, 1,500 issued……………. 1,500Paid-in capital in excess of par common……………………………… 37,500

Total paid-in capital…………………… $59,000Retained earnings………………………. 40,000Total stockholders’ equity…………… $99,000

Notice how the stock is described in each line…..par value, number of shares authorized and then number of shares issued



Account for cash dividends


Dividend DatesDividend DatesDividend DatesDividend Dates

• Declaration date

• Date of record

• Payment date


Declaring and Paying DividendsDeclaring and Paying DividendsS13-8S13-8


Preferred stock: 4% x $100,000 $4,000

Common: $0.50 x 50,000 25,000

Total dividends $29,000

GENERAL JOURNAL


2008

Dec 15 Retained earnings 29,000

Dividends payable 29,000

The declaration of a cash dividend decreases retained earnings and creates a current liability




GENERAL JOURNAL


2009

Jan 4 Dividends payable 29,000

Cash 29,000


Preferred: Per Share DividendPreferred: Per Share DividendPreferred: Per Share DividendPreferred: Per Share Dividend

• Stated as percentage of par value or as specified amount

• How much does one share of 3% preferred stock with a $50 par value receive when dividends are declared and paid? $1.50


Preferred: Per Share DividendPreferred: Per Share DividendPreferred: Per Share DividendPreferred: Per Share Dividend

• Stated as percentage of par value or as specified amount

• How much does one share of $4 preferred stock with a $50 par value receives when dividends are declared and paid? $4


Cumulative & Noncumulative Cumulative & Noncumulative Preferred StockPreferred Stock

Cumulative & Noncumulative Cumulative & Noncumulative Preferred StockPreferred Stock

• Cumulative preferred stock - accumulates dividends each year until the dividends are paid– Dividends in arrears - dividends passed or not

paid– Dividends in arrears - not a liability

• Noncumulative preferred stock – dividends not paid do not accumulated from one year to the next

Assume that preferred stock is cumulative if it is not specifically designated as noncumulative


S13-9S13-9S13-9S13-9

1. Preferred stock is cumulative because it is not specifically designated as noncumulative

2. Preferred dividend per year: 5% x $10 x 4,000 = $2,000

2005: Preferred stockholders get $2,000 Common stockholders get the rest, $13,000


S13-9S13-9S13-9S13-9

3. 2006: Dividends in arrears = $2,0002007: Dividends in arrears = $4,0002008: Preferred stockholders get $6,000(2 years in arrears and current year)Common stockholders get the rest, $9,000

What if the preferred stock was noncumulative? How would the $15,000 be divided? Preferred, $2,000 and Common, $13,000


E13-21E13-21E13-21E13-21

1. Preferred stock is cumulative because it is not specifically designated as noncumulative

2. Preferred dividend per year: 8% x $10 x 20,000 = $16,000

2007: Preferred stockholders get $10,000 (Note: Dividends in arrears of $6,000)

Common stockholders get nothing


E13-21E13-21E13-21E13-21

3. 2008:Preferred stockholders get:Dividends in arrears $6,000Current year’s 16,000 Total to preferred stockholders $22,000

Common stockholders get the rest, $28,000



Use different stock values in decision making


Different Values of StockDifferent Values of StockDifferent Values of StockDifferent Values of Stock

• Market value - current selling price

• Book value - equity a stockholder has in net assets of the corporation


Book Value per ShareBook Value per ShareBook Value per ShareBook Value per Share

Book value common =

(Stockholders’ equity – Preferred Equity)

÷ Number of shares outstanding


E13-23E13-23E13-23E13-23

Book value per share on common:

Total stockholders’ equity $277,000

Attributable to preferred:

$50 par x 1,000 shares (50,000)

Attributable to common $227,000

Per share:

$227,000 / 5,000 = $45.40


E13-24E13-24E13-24E13-24

Book value per share on common:Total stockholders’ equity $277,000Attributable to preferred:

Dividends in arrears ($50,000 x 6% x 3 years) (9,000)$50 par x 1,000 shares (50,000)

Attributable to common $218,000Per share: $218,000 / 5,000 = $43.60



Evaluate return on assets and return on stockholders’ equity


Rate of Return on Total AssetsRate of Return on Total AssetsE13-25E13-25

Rate of Return on Total AssetsRate of Return on Total AssetsE13-25E13-25

Net Income + Interest Expense Average Total Assets

$18,000,000 + 2,400,000($326,000,000 + 317,000,000) / 2

$20,400,000$321,500,000

.063


Rate of Return on Common Rate of Return on Common Stockholders’ Equity - E13-25Stockholders’ Equity - E13-25Rate of Return on Common Rate of Return on Common

Stockholders’ Equity - E13-25Stockholders’ Equity - E13-25

Net Income – Preferred DividendsAverage Common Stockholders’ Equity

$18,000,000 – ($2x 100,000)($184,000,000 + $176,000,000) / 2

$17,800,000$180,000,000

.099



Account for the income tax of a corporation


Income TaxesIncome Taxes

Income tax expense =Income before income tax (from income statement)× Income tax rate

Income tax payable =Taxable income (from the tax return filed with IRS)× Income tax rate

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


Income TaxesIncome TaxesIncome TaxesIncome Taxes

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




(in millions)Income Tax Expense(400 x 37.5%) 150

Income Tax Payable(344 x 37.5%) 129Deferred Tax Liability 21


E13-26E13-26E13-26E13-26INCOME STATEMENT:

Income before income tax $400

Income tax expense 150

Net income $ 250

BALANCE SHEET:

Current liabilities:

Income tax payable $ 129

Long-term liabilities:

Deferred tax liability $ 21


End of Chapter 13End of Chapter 13End of Chapter 13End of Chapter 13

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Copyright © 2007 Prentice-Hall. All rights reserved 1 Corporations: Paid-in Capital and the Balance Sheet Chapter 13