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Corporations: Paid-in Capital and the Balance Sheet

Corporations: Paid-in Capital and the Balance Sheet. Chapter 11. Objective 1. Identify the characteristics of a corporation. Characteristics. Separate legal entity from the owners (stockholders) - formed under laws of a particular state

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Corporations: Paid-in Capital and the Balance Sheet

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  1. Corporations: Paid-in Capital and the Balance Sheet Chapter 11

  2. Objective 1 Identify the characteristics of a corporation

  3. Characteristics • 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

  4. Characteristics • 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

  5. Organizing 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

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

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

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

  9. Sole-proprietor Corporation Stockholders’ Equity Paid in Capital Owner, Capital Investments Investments Withdrawals Net Income Separate investments by owners (stockholders) and the earnings of the company into 2 sections of stockholders’ equity Retained Earnings Dividends Net Income

  10. Stockholders’ Equity Issue stock Cash XXXX Common Stock XXXX

  11. Stockholders’ Equity Close income summary Income Summary XXXX Retained Earnings XXXX

  12. Stockholders’ Rights • Four basic rights • Vote • Dividends • Liquidation • Preemption

  13. Classes 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

  14. Classes of Stock • Par value • No-par value

  15. Objective 2 Record the issuance of stock

  16. Issuing Stock Paid-in Capital Cash Common Stock Amount received Amount received over par Par Paid-in Capital in Excess of Par

  17. Issuing Stock On June 2, Mustang Properties issued 1,000 shares of $1 par common stock for cash of $1 per share Jun 2 Cash 1,000 Common Stock 1,000 (1,000 shares x $1)

  18. E11-14 Jun 19 Cash 8,000 Common Stock 1,000 Paid-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

  19. E11-14 Jun 19 Cash 8,000 Common Stock 1,000 Paid-in Capital in Excess of Par-common 7,000 Jun 19 Cash 8,000 Common Stock 1,000 Paid-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?

  20. E11-14 Jun 19 Cash 8,000 Common Stock 1,000 Paid-in Capital in Excess of Par-common 7,000 Jun 19 Cash 8,000 Common 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

  21. E11-14 Jul 3 Cash 15,000 Preferred Stock 15,000 This is no par stock, so the entire proceeds are credited to the Preferred Stock account

  22. E11-14 Jul 11 Equipment 20,000 Common Stock 3,000 Paid-in Capital in Excess of Par – Common 17,000 When you issue stock for a noncash asset, debit the asset for its fair market value

  23. Paid-in Capital in Excess of Par, Common Preferred Stock Common Stock E11-14 (2) Paid-in Capital 1,000 7,000 15,000 3,000 17,000 24,000 4,000 Total Paid-in Capital = $43,000

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

  25. E11-17 Aug 6 Cash 13,000 Common Stock 500 Paid in Capital in Excess of Par, Common 12,500 12 Cash 20,000 Preferred Stock 20,000 14 Land 26,000 Common Stock 1,000 Paid in Capital in Excess of Par, Common 25,000

  26. E11-17 Aug 31 Income summary 40,000 Retained earnings 40,000

  27. Notice how the stock is described in each line…..par value, number of shares authorized and then number of shares issued E11-17 Stockholders’ Equity Paid-in capital: Preferred stock, $3, no-par, 100,000 authorized, 300 issued………………. $20,000 Common stock, $1 par, 500,000authorized, 1,500 issued……………. 1,500 Paid-in capital in excess of par common……………………………… 37,500 Total paid-in capital…………………… $59,000 Retained earnings………………………. 40,000 Total stockholders’ equity…………… $99,000

  28. Objective 4 Account for cash dividends

  29. Dividend Dates • Declaration date • Date of record • Payment date

  30. Declaring and Paying DividendsS11-8 The declaration of a cash dividend decreases retained earnings and creates a current liability Preferred stock: 4% x $100,000 $4,000 Common: $0.50 x 50,000 25,000 Total dividends $29,000 2008 Dec 15 Retained earnings 29,000 Dividends payable 29,000

  31. Declaring and Paying DividendsS11-8 2009 Jan 4 Dividends payable 29,000 Cash 29,000

  32. Preferred: 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

  33. Preferred: 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

  34. Cumulative & Noncumulative Preferred 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

  35. 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 S11-9

  36. 3. 2006: Dividends in arrears = $2,000 2007: Dividends in arrears = $4,000 2008: Preferred stockholders get $6,000 (2 years in arrears and current year) Common stockholders get the rest, $9,000 S11-9 What if the preferred stock was noncumulative? How would the $15,000 be divided? Preferred, $2,000 and Common, $13,000

  37. 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 E11-21

  38. 3. 2008: Preferred stockholders get: Dividends in arrears $6,000 Current year’s 16,000 Total to preferred stockholders $22,000 Common stockholders get the rest, $28,000 E11-21

  39. Objective 5 Use different stock values in decision making

  40. Different Values of Stock • Market value - current selling price • Book value - equity a stockholder has in net assets of the corporation

  41. Book Value per Share Book value common = (Stockholders’ equity – Preferred Equity) ÷ Number of shares outstanding

  42. E11-23 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

  43. E11-24 Book value per share on common: Total stockholders’ equity $277,000 Attributable 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 $218,000 Per share: $218,000 / 5,000 = $43.60

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

  45. Rate of Return on Total AssetsE11-25 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

  46. Rate of Return on Common Stockholders’ Equity - E11-25 Net Income – Preferred Dividends Average Common Stockholders’ Equity $18,000,000 – ($2x 100,000) ($184,000,000 + $176,000,000) / 2 $17,800,000 $180,000,000 .099

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

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

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

  50. E11-26 (in millions) Income Tax Expense (400 x 37.5%) 150 Income Tax Payable (344 x 37.5%) 129 Deferred Tax Liability 21

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