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

2. Review the characteristics of a corporation
Learning Objective 1
Review the characteristics of a corporation

3. Advantages and Disadvantages of a Corporation
Ability to raise money
Continuous life
Easy to transfer ownership
No mutual agency
Limited liability
Separation of ownership and management
Double taxation
Expensive government regulation

4. Capital Stock
State authorizes how many shares of stock a corporation may issue through corporate bylaws
Corporation issues stock certificates when stockholders buy stock
Stock held by stockholders is outstanding
Copyright (c) Prentice Hall. All rights reserved

5. Learning Objective 2
Describe the two sources of stockholders’ equity and the classes of stock

6. Stockholders’ Equity Paid-in capital Retained earnings
Amounts received from stockholders
Common stock is main source
Externally generated
Resulting from transactions with outsiders
Earned by profitable operations
Internally generated
Results from internal corporate decisions and earnings
Paid-in capital
Retained earnings

7. Stockholders’ Rights Four basic rights Vote Dividends Liquidation
Preemption
that is commonly withheld. (the right to keep the ownership proportion in the corporation) 7

8. Par and No-par Par value No-par
Arbitrary amount assigned by company to a share of stock
Usually set low as to avoid legal difficulties
No arbitrary amount assigned by company to a share of stock
Par value
No-par

9. Classes of Stock Common stock Preferred stock
Basic form of capital stock
Owners have certain advantages over common
Common stock
Preferred stock

10. Learning Objective 3
Journalize the issuance of stock and prepare the stockholders’ equity section of a corporation balance sheet

11. Accounting for the Issuance of Stock
Issue stock at par
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Cash
Common stock
Copyright (c) Prentice Hall. All rights reserved

12. Accounting for the Issuance of Stock
Issue stock at a premium
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Cash
Common stock
Paid-in capital in excess of par
Copyright (c) Prentice Hall. All rights reserved

13. Issuing Stock Paid-in capital Cash Common stock Amount received Amount
over par
Par
Paid-in capital in excess of par
Copyright (c) Prentice Hall. All rights reserved

14. Accounting for Stock Issuances
No-par stock
No “Paid-in capital in excess of par” account needed
Full amount received is credited to “Common stock” account
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”
Copyright (c) Prentice Hall. All rights reserved

15. Accounting for Stock Issuances
Issuing stock for noncash assets
Issuing preferred stock
Copyright (c) Prentice Hall. All rights reserved

16. Stockholders’ Equity on the Balance Sheet
Equity accounts are listed in the following order on the balance sheet
Preferred stock
Paid-in capital in excess of par – preferred
Common stock
Paid-in capital in excess of par – common
Retained earnings
Copyright (c) Prentice Hall. All rights reserved

17. Copyright (c) 2009 Prentice Hall. All rights reserved

18. Exercise 11-15 Oct 19 Cash (1300 x $12) 15,600 Common stock 1,300
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Oct 19
Cash (1300 x $12)
15,600
Common stock
1,300
Paid-in capital in excess of par-C/S
14,300
Nov 3
Cash
10,000
Preferred stock 11
Equipment
18,000
6,000
12,000
Copyright (c) Prentice Hall. All rights reserved

19. Exercise 11-15 (continued)
Total paid-in capital =
$14,300
$10,000
$1,300
$6,000
$12,000
$43,600
Copyright (c) Prentice Hall. All rights reserved

20. Illustrate Retained earnings transactions
Learning Objective 4
Illustrate Retained earnings transactions

21. Retained Earnings Income Summary Expenses Revenues Net Income
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Income summary
Retained earnings
Copyright (c) Prentice Hall. All rights reserved

22. Deficit Balance
If a company incurs a loss, Retained earnings is decreased
A debit balance in Retained earnings is called a deficit
Copyright (c) Prentice Hall. All rights reserved

23. Account for cash dividends
Learning Objective 5
Account for cash dividends

24. Dividend Dates Copyright (c) 2009 Prentice Hall. All rights reserved
Declaration date
Date of record
Payment date
Copyright (c) Prentice Hall. All rights reserved

25. Dividends Preferred dividends expressed as either:
A percent of par value
Or a flat dollar amount per share
Common dividends expressed as a dollar amount per share
2,000 shares of $100 par 8% preferred = $16,000 dividend
2,000 shares of no-par $3 preferred = $6,000 dividend
Copyright (c) Prentice Hall. All rights reserved

26. Accounting for Dividends
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Retained earnings
Dividends payable
Declaration of cash dividend
Cash
Payment of cash dividend
Copyright (c) Prentice Hall. All rights reserved

27. Dividing Dividends between Preferred and Common
Preferred stockholders receive dividends before common
Common stockholders will only receive dividends if total declared is large enough
Copyright (c) Prentice Hall. All rights reserved

28. Dividend Example A corporation has the following shares outstanding:
10,000 shares of $50 par, 6% preferred stock
50,000 share of $1 par common stock
Preferred dividend = 10,000 x $50 x 6% = $30,000
Situation 1: A $50,000 cash dividend is declared
Situation 2: A $25,000 cash dividend is declared
Preferred receives $30,000
Common receives $20,000
Preferred receives ?
Common receives ?
Copyright (c) Prentice Hall. All rights reserved

29. Cumulative and Noncumulative 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
Copyright (c) Prentice Hall. All rights reserved

30. Preferred dividend = 5,000 x $15 x 5% = $3,750
Problem 11-33A
Preferred dividend = 5,000 x $15 x 5% = $3,750
a) noncumulative
Problem shows how cumulative and noncumulative preferred differ.
Hip Skincare has 5,000 shares of 5%, $15 par value preferred stock and 80,000 shares of $2.25 par common stock outstanding. During a three-year period, Hip declared and paid cash dividends as follows: 2010, $2,000; 2011, $15,000; and 2012, $20,000. Preferred will receive the first $3,750 of dividends declared.
In part (a), the preferred stock is noncumulative. In 2010, only $2,000 of dividends are declared. Preferred receives all of it. Common gets nothing. The preferred shareholders will never receive the unpaid $1,750 from In 2011, $15,000 is declared. The first $2,000 goes to preferred and the remaining $13,000 goes to common. In 2012, the same pattern follows, except common receives $18,000
Copyright (c) Prentice Hall. All rights reserved 30

31. Problem 11-33A (continued)
Preferred dividend = 5,000 x $15 x 5% = $3,750
b) cumulative
Copyright (c) Prentice Hall. All rights reserved

32. Problem 11-33A GENERAL JOURNAL Retained earnings 15,000
DATE
DESCRIPTION
REF
DEBIT
CREDIT
2011 12 22
Retained earnings
15,000
Dividends payable – C/S
11,250
Dividends payable – P/S
3,750
2012 1 14
Cash
Copyright (c) Prentice Hall. All rights reserved

33. Use different stock values in decision making
Learning Objective 6
Use different stock values in decision making

34. Different Values of Stock
Market value
Price at which a person can buy or sell a share
Most important to shareholders
Liquidation value
Amount guaranteed to preferred if company liquidates
Book value
Amount of equity per one share of stock
Copyright (c) Prentice Hall. All rights reserved

35. Book Value per Share Book value of preferred stock:
Liquidation price or Preferred stock account A
Dividends in arrears on any outstanding preferred shares B
Total book value attributed to preferred stock
A+B
Number of outstanding preferred shares C
Book value per share of preferred stock
(A+B)/C
Book value of common stock:
Total stockholders’ equity D
Less: book value attributed to preferred
A+B
Total book value attributed to common stock
D-(A+B)
Number of outstanding common shares E
Book value per share of common stock
D-(A+B)/E
Copyright (c) Prentice Hall. All rights reserved

36. Evaluate return on assets and return on stockholders’ equity
Learning Objective 7
Evaluate return on assets and return on stockholders’ equity

37. Rate of Return on Total Assets
Net income + Interest expense
Average total assets
Copyright (c) Prentice Hall. All rights reserved

38. Rate of Return on Common Stockholders’ Equity
Net income – preferred dividends
Average common stockholders’ equity
Copyright (c) Prentice Hall. All rights reserved

39. Account for the income tax of a corporation
Learning Objective 8
Account for the income tax of a corporation

40. Income Taxes Income before taxes from the income statement
Income tax rate
Income tax expense
Taxable income from the tax return
Income tax rate
Income tax payable
Copyright (c) Prentice Hall. All rights reserved

41. Differences between Income Statement and the Tax Return
Financial statement showing revenues and expenses
Tax return
Reports to Internal Revenue Service
Accounting rules and tax rules can differ
Example: Depreciation expense
Income statement: straight-line
Tax return: accelerated method used to reduce taxable income and save tax dollars
Normal first year result: a deferred tax liability
Copyright (c) Prentice Hall. All rights reserved

42. End of Chapter 11