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 2 Objective 1 Identify the characteristics of a corporation
Copyright © 2007 Prentice-Hall. All rights reserved 3 CharacteristicsCharacteristics 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
Copyright © 2007 Prentice-Hall. All rights reserved 4 CharacteristicsCharacteristics 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
Copyright © 2007 Prentice-Hall. All rights reserved 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
Copyright © 2007 Prentice-Hall. All rights reserved 6 Organizing a Corporation Stockholders elect board of directors Board –Sets policy –Appoints officers –Elects a chairperson
Copyright © 2007 Prentice-Hall. All rights reserved 7 Capital Stock Corporate ownership - evidenced by a stock certificate Total number of shares authorized is limited by charter
Copyright © 2007 Prentice-Hall. All rights reserved 8 Stockholders’ Equity Two components: –Paid-in capital –Retained earnings
Copyright © 2007 Prentice-Hall. All rights reserved 9 Stockholders’ Equity Sole-proprietorCorporation Owner, Capital Investments Net Income Paid in Capital Investments Retained Earnings Net Income Withdrawals Dividends Separate investments by owners (stockholders) and the earnings of the company into 2 sections of stockholders’ equity
Copyright © 2007 Prentice-Hall. All rights reserved 10 Stockholders’ Equity Issue stock GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT CashXXXX Common StockXXXX
Copyright © 2007 Prentice-Hall. All rights reserved 11 Stockholders’ Equity Close income summary GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Income SummaryXXXX Retained EarningsXXXX
Copyright © 2007 Prentice-Hall. All rights reserved 12 Stockholders’ Rights Four basic rights –Vote –Dividends –Liquidation –Preemption
Copyright © 2007 Prentice-Hall. All rights reserved 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
Copyright © 2007 Prentice-Hall. All rights reserved 14 Classes of Stock Par value No-par value
Copyright © 2007 Prentice-Hall. All rights reserved 15 Objective 2 Record the issuance of stock
Copyright © 2007 Prentice-Hall. All rights reserved 16 Issuing Stock Paid-in Capital Common Stock Par Paid-in Capital in Excess of Par Amount received over par Cash Amount received
Copyright © 2007 Prentice-Hall. All rights reserved 17 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Issuing Stock On June 2, Mustang Properties issued 1,000 shares of $1 par common stock for cash of $1 per share Jun2 Cash 1,000 Common Stock1,000 (1,000 shares x $1)
Copyright © 2007 Prentice-Hall. All rights reserved 18 E13-14E13-14 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Jun19 Cash 8,000 Common Stock1,000 Paid-in Capital in Excess of Par-common7,000 Just the par value goes to the Common Stock account. Everything else goes to the Paid in Capital in Excess
Copyright © 2007 Prentice-Hall. All rights reserved 19 E13-14E13-14 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Jun19 Cash 8,000 Common Stock1,000 Paid-in Capital in Excess of Par-common7,000 Jun19 Cash 8,000 Common Stock1,000 Paid-in Capital in Excess of Stated-common7,000 What if this stock was no par stock with a stated value of $1? How would the entry be different?
Copyright © 2007 Prentice-Hall. All rights reserved 20 E13-14E13-14 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Jun19 Cash 8,000 Common Stock1,000 Paid-in Capital in Excess of Par-common7,000 Jun19 Cash 8,000 Common Stock8,000 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
Copyright © 2007 Prentice-Hall. All rights reserved 21 E13-14E13-14 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Jul3 Cash 15,000 Preferred Stock15,000 This is no par stock, so the entire proceeds are credited to the Preferred Stock account
Copyright © 2007 Prentice-Hall. All rights reserved 22 E13-14E13-14 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT Jul11 Equipment 20,000 Common Stock3,000 Paid-in Capital in Excess of Par – Common17,000 When you issue stock for a noncash asset, debit the asset for its fair market value
Copyright © 2007 Prentice-Hall. All rights reserved 23 E13-14 (2) Paid-in Capital Preferred Stock Paid-in Capital in Excess of Par, Common Common Stock 1,0007,000 15,000 3,00017,000 4,000 24,000 Total Paid-in Capital = $43,000
Copyright © 2007 Prentice-Hall. All rights reserved 24 Objective 3 Prepare the stockholders’ equity section of a corporation balance sheet
Copyright © 2007 Prentice-Hall. All rights reserved 25 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT E13-17E13-17 Aug6Cash13,000 Common Stock500 Paid in Capital in Excess of Par, Common12,500 12Cash20,000 Preferred Stock20,000 14Land26,000 Common Stock1,000 Paid in Capital in Excess of Par, Common25,000
Copyright © 2007 Prentice-Hall. All rights reserved 26 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT E13-17E13-17 Aug31Income summary40,000 Retained earnings40,000
Copyright © 2007 Prentice-Hall. All rights reserved 27 E13-17E13-17 Stockholders’ Equity Paid-in capital: Preferred stock, $3, no-par, 100,000 authorized, 300 issued……………….$20,000 Common stock, $1 par, 500,000 authorized, 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 Notice how the stock is described in each line…..par value, number of shares authorized and then number of shares issued
Copyright © 2007 Prentice-Hall. All rights reserved 28 Objective 4 Account for cash dividends
Copyright © 2007 Prentice-Hall. All rights reserved 29 Dividend Dates Declaration date Date of record Payment date
Copyright © 2007 Prentice-Hall. All rights reserved 30 Declaring and Paying Dividends S13-8 Preferred stock: 4% x $100,000$4,000 Common: $0.50 x 50,00025,000 Total dividends$29,000 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT 2008 Dec15Retained earnings29,000 Dividends payable29,000 The declaration of a cash dividend decreases retained earnings and creates a current liability
Copyright © 2007 Prentice-Hall. All rights reserved 31 Declaring and Paying Dividends S13-8 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT 2009 Jan 4Dividends payable29,000 Cash29,000
Copyright © 2007 Prentice-Hall. All rights reserved 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
Copyright © 2007 Prentice-Hall. All rights reserved 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
Copyright © 2007 Prentice-Hall. All rights reserved 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
Copyright © 2007 Prentice-Hall. All rights reserved 35 S13-9S Preferred stock is cumulative because it is not specifically designated as noncumulative 2. Preferred dividend per year: 5% x $10 x 4,000 = $2, : Preferred stockholders get $2,000 Common stockholders get the rest, $13,000
Copyright © 2007 Prentice-Hall. All rights reserved 36 S13-9S : Dividends in arrears = $2, : Dividends in arrears = $4, : 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
Copyright © 2007 Prentice-Hall. All rights reserved 37 E13-21E Preferred stock is cumulative because it is not specifically designated as noncumulative 2. Preferred dividend per year: 8% x $10 x 20,000 = $16, : Preferred stockholders get $10,000 (Note: Dividends in arrears of $6,000) Common stockholders get nothing
Copyright © 2007 Prentice-Hall. All rights reserved 38 E13-21E : Preferred stockholders get: Dividends in arrears$6,000 Current year’s16,000 Total to preferred stockholders$22,000 Common stockholders get the rest, $28,000
Copyright © 2007 Prentice-Hall. All rights reserved 39 Objective 5 Use different stock values in decision making
Copyright © 2007 Prentice-Hall. All rights reserved 40 Different Values of Stock Market value - current selling price Book value - equity a stockholder has in net assets of the corporation
Copyright © 2007 Prentice-Hall. All rights reserved 41 Book Value per Share Book value common = (Stockholders’ equity – Preferred Equity) ÷ Number of shares outstanding
Copyright © 2007 Prentice-Hall. All rights reserved 42 E13-23E13-23 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
Copyright © 2007 Prentice-Hall. All rights reserved 43 E13-24E13-24 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
Copyright © 2007 Prentice-Hall. All rights reserved 44 Objective 6 Evaluate return on assets and return on stockholders’ equity
Copyright © 2007 Prentice-Hall. All rights reserved 45 Rate of Return on Total Assets E13-25 Net Income + Interest Expense Average Total Assets $18,000, ,400,000 ($326,000, ,000,000) / 2 $20,400,000 $321,500,
Copyright © 2007 Prentice-Hall. All rights reserved 46 Rate of Return on Common Stockholders’ Equity - E13-25 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,
Copyright © 2007 Prentice-Hall. All rights reserved 47 Objective 7 Account for the income tax of a corporation
Copyright © 2007 Prentice-Hall. All rights reserved 48 Income 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
Copyright © 2007 Prentice-Hall. All rights reserved 49 Income Taxes Deferred tax liability = difference between income tax expense and income tax payable for any one year
Copyright © 2007 Prentice-Hall. All rights reserved 50 E13-26E13-26 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT (in millions) Income Tax Expense (400 x 37.5%)150 Income Tax Payable (344 x 37.5%)129 Deferred Tax Liability21
Copyright © 2007 Prentice-Hall. All rights reserved 51 E13-26E13-26 INCOME 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
Copyright © 2007 Prentice-Hall. All rights reserved 52 End of Chapter 13