Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1 Review the characteristics of a corporation 1 1

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. ADVANTAGES 1.Corporations can raise more money 2.Corporations have continuous life 3.Ownership transfer is easy 4.No mutual agency 5.Stockholders have limited liability DISADVANTAGES 1.Ownership and management separated. 2.Double taxation 3.Government regulation is expensive 4.Start-up costs are higher 2

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Authorization–State’s permission to operate Authorized stock–How many shares of a class of stock a corporation may issue Capital stock–Represents ownership of the corporation's capital Stock certificate–Paper evidencing ownership in a corporation Company name Stockholder name Number of shares owned Outstanding stock–Stock held by stockholders 3

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Due to the recent beef recalls, Southern Steakhouse is considering incorporating. Bill, the owner, wants to protect his personal assets in the event the restaurant is sued. Which advantage of incorporating is most applicable? 4 Stockholders have limited liability.

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Describe the two sources of stockholders’ equity and the classes of stock 5 2 2

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Paid-in capital (Contributed capital) Amounts received from stockholders Common stock is main source Externally generated Resulting from transactions with outsiders Retained earnings Earned by profitable operations Internally generated Results from internal corporate decisions to retain net income for use in the company 6

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Common stock Four basic rights Vote—voting on corporate matters Dividends—receive a proportionate part of dividend declared Liquidation—receive a proportionate part of assets remaining Preemption—maintain their proportionate ownership Preferred stock Certain advantages over common stock Receive dividends before common Fixed dividend amount Upon liquidation, receive assets before common Also have basic rights of common stockholders unless withheld 7

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Par value Arbitrary amount assigned to a share of stock Set when the corporate charter is filed Usually set low as to avoid legal difficulties No-par No arbitrary amount assigned Could have a stated value Stated value treated as par 8

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Journalize the issuance of stock and prepare the stockholders’ equity section of a corporation balance sheet 9 3 3

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Sell directly to stockholders Use an underwriter/brokerage firm Buys unsold stock Issue price–price received for issuing stock Usually exceeds par value Stock exchange– here public company stock is traded NYSE–New York Stock Exchange Wall Street Journal Tombstone—an advertisement for initial sale of a stock 10

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Issuing common stock at par Issuing common stock above par Amount received above par is called a premium Not a gain; called additional paid-in capital Another account is created for the premium amount 11

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Stockholders’ Equity Presentation The balance of the Common stock account is calculated 12 Total Paid-in capital is the sum of Common stock plus Paid-in capital in excess of par

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. No-par stock No Paid-in capital in excess of par account needed Full amount received is credited to Common stock Balance sheet shows only the Common stock account 13

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Stated value stock Similar to accounting for par value stock Amount above stated value is credited to Paid-in capital in excess of stated value Issuing stock for assets other than cash Asset is debited for its fair value Building is debited instead of cash 14

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Issuing preferred stock Similar to issuing common stock, except Preferred stock is credited at par value Preferred stock usually is not issued above par 15

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Equity accounts are listed in the following order on the balance sheet: Preferred stock, Common stock, Retained earnings 16

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Scifilink.com issued stock beginning in 2012 and reported the following on its balance sheet at December 31, 2012: Common stock, $ 2.00 par value Authorized: 6,000 shares Issued: 4,000 shares $ 8,000 Paid-in capital in excess of par 4,000 Retained earnings 26,500 Requirement: Journalize the company’s issuance of the stock for cash. 22

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 18 Journal Entry DATE ACCOUNTS DEBITCREDIT Dec 31 Cash12,000 Common stock8,000 Paid in capital in excess of par4,000 Common stock, $ 2.00 par value Authorized: 6,000 shares Issued: 4,000 shares $ 8,000 Paid-in capital in excess of par 4,000 Retained earnings 26,500

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Susie Systems completed the following stock issuance transactions: May 19 Issued 2,000 shares of $1 par common stock for cash of $9.50 per share. June 3 Sold 300 shares of $3, no-par preferred stock for $15,000 cash. June 11 Received equipment with market value of $78,000. Issued 3,000 shares of the $1 par common stock in exchange. Requirements: 1. Journalize the transactions. Explanations are not required. 2. How much paid-in capital did these transactions generate for Susie Systems? 19

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Susie Systems completed the following stock issuance transactions: May 19 Issued 2,000 shares of $1 par common stock for cash of $9.50 per share. 20 Journal Entry DATE ACCOUNTS DEBITCREDIT May 19 Cash19,000 Common stock2,000 Paid in capital in excess of par17,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Susie Systems completed the following stock issuance transactions: June 3 Sold 300 shares of $3, no-par preferred stock for $15,000 cash. 21 Journal Entry DATE ACCOUNTS DEBITCREDIT Jun 3 Cash15,000 Preferred stock15,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Susie Systems completed the following stock issuance transactions: June 11 Received equipment with market value of $78,000. Issued 3,000 shares of the $1 par common stock in exchange. 22 Journal Entry DATE ACCOUNTS DEBITCREDIT Jun 11 Equipment78,000 Common stock3,000 Paid in capital in excess of par75,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall How much paid-in capital did these transactions generate for Susie Systems? $112,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Illustrate Retained earnings transactions

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Closing entries Step 1 – Close Revenues Step 2 – Close Expenses 25

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Closing entries Step 3 – Close Income summary 26

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A loss causes Retained earnings to decrease A debit balance in Retained earnings is a deficit 27

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A deficit is reported as a negative amount 28

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The data for Amanda’s Tax Service, Inc., for the year ended August 31, 2012, follow: Journalize the required closing entries for the year. Step 1 29 Cost of goods sold$ 62,000Sales revenue$ 125,000 Dividends14,000Operating expenses44,000 Interest revenue1,800Retained earnings24,000 Journal Entry DATEACCOUNTSDEBITCREDIT Aug 31 Sales revenue125,000 Interest revenue1,800 Income summary126,800

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The data for Amanda’s Tax Service, Inc., for the year ended August 31, 2012, follow: Journalize the required closing entries for the year. Step 2 30 Cost of goods sold$ 62,000Sales revenue$ 125,000 Dividends14,000Operating expenses44,000 Interest revenue1,800Retained earnings24,000 Journal Entry DATEACCOUNTSDEBITCREDIT Aug 31 Income summary106,000 Cost of goods sold62,000 Operating expenses44,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The data for Amanda’s Tax Service, Inc., for the year ended August 31, 2012, follow: Journalize the required closing entries for the year. Step 3 31 Cost of goods sold$ 62,000Sales revenue$ 125,000 Dividends14,000Operating expenses44,000 Interest revenue1,800Retained earnings24,000 Journal Entry DATEACCOUNTSDEBITCREDIT Aug 31 Income summary20,800 Retained earnings20,800

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The data for Amanda’s Tax Service, Inc., for the year ended August 31, 2012, follow: Journalize the required closing entries for the year. Step 4 32 Cost of goods sold$ 62,000Sales revenue$ 125,000 Dividends14,000Operating expenses44,000 Interest revenue1,800Retained earnings24,000 Journal Entry DATEACCOUNTSDEBITCREDIT Aug 31Retained earnings 14,000 Dividends 14,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The data for Amanda’s Tax Service, Inc., for the year ended August 31, 2012, follow: 2. What is the balance in Retained earnings after the closing entries are posted? 33 Cost of goods sold$ 62,000Sales revenue$ 125,000 Dividends14,000Operating expenses44,000 Interest revenue1,800Retained earnings24,000 Beginning Retained Earnings, Sep 1, 2011$24,000 Plus: Net income 20,800 44,800 Minus: Dividends 14,000 Ending Retained Earnings, Sep 1, 2011$30,800

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for cash dividends

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Sometimes a state prohibits using Paid-in capital for dividends Legal capital is the portion of equity unavailable for dividends Dividends are declared before paying Three dates: Declaration date–Board declares a dividend and creates a liability Date of record–determines which stockholders receives dividends Payment date–pay dividends and remove liability 35

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Preferred dividends expressed as either: A percent of par value Or a flat dollar amount per share Common dividends are expressed as a dollar amount per share 36 2,000 shares of $100 par 8% preferred = $16,000 dividend 2,000 shares of no-par $3 preferred = $6,000 dividend

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Declaration date Date of Record (no entry) Payment date 37

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Preferred stockholders receive dividends before common Common stockholders receive dividends if total declared is large enough to cover preferred 38

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cumulative preferred stock Accumulates dividends each year until the dividends are paid Dividends in arrears—dividends passed or not paid Noncumulative preferred stock Dividends not paid do not accumulated from one year to the next Dividend in arrears are paid first, then current dividends paid 39

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A company declares $50,000 for dividends In arrears, 1 year at $6,000 Preferred gets $6,000 in arrears + $6,000 current Common receives the remainder Journal entry 40

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Frenchvanilla Company earned Net income of $75,000 during the year ended December 31, On December 15, Frenchvanilla declared the annual cash dividend on its 5% preferred stock (par value, $115,000) and a $0.50 per share cash dividend on its common stock (55,000 shares). Frenchvanilla then paid the dividends on January 4, Journalize for Frenchvanilla: a. Declaring the cash dividends on December 15, Journal Entry DATEACCOUNTSDEBITCREDIT Dec 31Retained earnings 33,250 Dividends Payable 33,250

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. (Continued) Journalize for Frenchvanilla: b. Paying the cash dividends on January 4, Journal Entry DATEACCOUNTSDEBITCREDIT Jan 4Dividends payable 33,250 Cash 33,250

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Use different stock values in decision making

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 44

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Book value attributed to preferred stock + any preferred dividends that are in arrears Book value attributed to preferred stock is either the number of outstanding preferred shares times liquidation value per share, OR the book value of preferred equity (the Preferred stock account balance) Plus any dividends that are in arrears, if the preferred stock is cumulative. 45

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Book value of preferred stock: Liquidation price or Preferred stock accountA Dividends in arrears on any outstanding preferred sharesB Total book value attributed to preferred stockA+B Number of outstanding preferred sharesC Book value per share of preferred stock(A+B)/C 46 Book value of common stock: Total stockholders’ equityD Less: book value attributed to preferredA+B Total book value attributed to common stockD-(A+B) Number of outstanding common sharesE Book value per share of common stockD- (A+B)/E

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Bronze Tint Trust has the following stockholders’ equity: Bronze Tint has not declared preferred dividends for five years (including the current year). 47 Paid-in capital: Preferred stock, 5%, $10 par, 6,000 shares authorized, 4,500 shares issued $ 45,000 Common stock, $0.20 par, 1,200,000 shares authorized and issued 240,000 Paid-in capital in excess of par—common400,000 Total paid-in capital$685,000 Retained earnings255,000 Total stockholders’ equity$ 940,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Compute the book value per share of Bronze Tint’s preferred and common stock. 48 Preferred stock Par value of Preferred stock$45,000 Cumulative dividends11,250 Total book value attributed to preferred stock 56,250 Number of outstanding preferred shares 4,500 Book value per share of preferred stock $12.50

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Compute the book value per share of Bronze Tint’s preferred and common stock. (*$ rounded) 49 Common stock Total stockholders’ Equity$940,000 Less: Preferred equity(56,250) Common equity $883,750 Number of outstanding preferred shares 1,200,000 Book value per share of preferred stock * $0.74