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Corporations: Paid-in Capital and the Balance Sheet. Chapter 13. Identify the Characteristics of a Corporation. Objective 1. Characteristics. separate legal entity continuous life and transferability of ownership no mutual agency limited liability of stockholders - PowerPoint PPT Presentation
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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 Structurein 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
Paid-in capitalPaid-in capital
Retained earningsRetained earnings
Owners’ equity in the corporationhas two components:
Stockholders’ Equity Example
On June 1, the Bloom’s Corporationissued stock valued at $10,000.
June 1Cash 10,000
Common Stock 10,000Issued stock
Stockholders’ Equity Example
Bloom’s Corporation net incomefor the year was $800,000.
December 31Income Summary 800,000
Retained Earnings 800,000To 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.
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 13Cash (10,000 shares @ $1) 10,000
Common Stock 10,000 Issue common stock at par
Issuing Stock Example
The shares were issued at a premium of $9 per share.
January 13Cash (10,000 shares @ $10) 100,000
Common Stock 10,000Paid-in Capital inExcess of Par-common 90,000
Issue common stock at a premium
Issuing Stock Example
The $1 stated value shares wereissued at a premium of $9 per share.
January 13Cash (10,000 shares @ $10) 100,000
Common Stock 10,000Paid-in Capital inExcess of Stated Value 90,000
Issue common stock at a premium
Issuing Stock Example
Assume the shares were no-par common stock.
January 13Cash (10,000 shares @ $10) 100,000
Common Stock 100,000Issue 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 11Building 100,000
Common Stock (15,000 @ $1) 15,000Paid-in Capital in Excessof 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.
Paid-in Capital:Preferred stock, 5%, $100 par,5,000 authorized, 400 shares issued $40,000Paid-in capital in excess of par–preferred 14,000Total paid-in capital, preferred stockholders $54,000
Review of Accountingfor Paid-In Capital
Stockholders’ Equity
Paid-in Capital:Common Stock, $10 par, 20,000 sharesauthorized, 4,500 issued $ 45,000Paid-in capital in excess of par–common 72,000Total paid-in capital $171,000Retained earnings 85,000Total stockholders’ equity $256,000
Review of Accountingfor Paid-In Capital
Stockholders’ Equity
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.
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.
Dividend Dates
• A corporation must declare a dividend before paying it.
• The board of directors alone has the authority to declare a dividend.
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
June 15Dividends Payable 60,000
Cash 60,000Paid a cash dividend
April 1Retained Earnings 60,000
Dividends Payable 60,000Declared a cash dividend
Cash Dividends Example
Preferred stock, 6%, 1,000 shares, $100 par
Common stock, 25,000 shares, $100 par
$50,000 dividends declared
Cash Dividends Example
Preferred dividend6% × $100 ×1,000 = $6,000
Common dividend $50,000 – $6,000 = $44,000
Preferred dividend6% × $100 ×10,000 = $60,000
Suppose there were 10,000,6%, par value preferred shares
Common shareholders receive nothing.
Cash Dividends Example
Cumulative and NoncumulativePreferred
• 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.
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
Paid-in Capital:Common Stock, $20 par value, 10,000 sharesauthorized, issued, and outstanding $200,000Paid-in capital in excess of par–common 100,000Total paid-in capital $300,000Retained earnings 100,000Total stockholders’ equity $400,000
Book value per share: $400,000 ÷ 10,000 = $40
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.
Accounting for Income Taxesby 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 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.