Corporations: Paid-in Capital and the Balance Sheet

 
 

1  

ACCT 202 
LECTURE 2 
 
Corporations: Paid-in 
Capital and the Balance Sheet 

Chapter 13

 
 

2  

Lecture Objectives  

1. Identify the Characteristics of a Corporation
2. Record the Issuance of Stock
3. Prepare the Stockholders’ Equity Section of a Corporation Balance Sheet
4. Account for Cash Dividends
5. Use Different Stock Values in Decision Making
6. Evaluate Return on Assets and Return on Stockholders’ Equity

 

 
 

3  

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

 
 

4  

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.

 
 

5  

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.

 
 

6  

Authority Structure 
in a Corporation 

Stockholders 

Board of Directors 

Chairperson of the Board 

President 

Various Vice-Presidents and Secretary 

Controller 

Treasurer

 
 

7  

Capital Stocks 

• 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.

 
 

8  

Stockholders’ Equity 

Paid-in capital 

Retained earnings 

Owners’ equity in the corporation

has two components:

 
 

9  

Stockholders’ Equity Example 

On June 1, the Bloom’s Corporation

issued stock valued at $10,000. 

June 1

Cash      10,000

      Common Stock     10,000

Issued stock

 
 

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Stockholders’ Equity Example 

 Bloom’s Corporation net income

for the year was $800,000.  

December 31

Income Summary   800,000

      Retained Earnings      800,000

To close net income to Retained Earnings

 
 

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Stockholders’ Rights 

• The ownership of stock entitles stockholders to four basic rights, unless specific rights are withheld by agreement.
• Vote
• Dividends
• Liquidation
• Preemption

 
 

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Classes of Stock 

• Common stock is the most basic form of capital stock.
• Preferred stock gives its owners certain advantages over common stockholders.

 
 

13  

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.

 
 

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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.

 
 

15  

O2: Issuing Stock Example 

• On January 13, Martin Corporation, which manufactures skateboards, issues 10,000 shares of common stock for $10 per share.

 
 

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Issuing Stock Example 

The shares were issued at par of $1. 

January 13

Cash (10,000 shares @ $1) 10,000

      Common Stock       10,000

Issue common stock at par

 
 

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Issuing Stock Example 

The shares were issued at a premium

of $9 per share. 

January 13

Cash (10,000 shares @ $10)  100,000

      Common Stock        10,000

      Paid-in Capital in

      Excess of Par-common     90,000

Issue common stock at a premium

 
 

18  

Issuing Stock Example 

The $1 stated value shares were

issued at a premium of $9 per share. 

January 13

Cash (10,000 shares @ $10)  100,000

      Common Stock        10,000

      Paid-in Capital in

      Excess of Stated Value         90,000

Issue common stock at a premium

 
 

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Issuing Stock Example 

Assume the shares were no-par common stock. 

January 13

Cash (10,000 shares @ $10)  100,000

      Common Stock        100,000

Issue no-par common stock

 
 

20  

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?

 
 

21  

Issuing Stock Example 

September 11

Building        100,000

      Common Stock (15,000 @ $1)    15,000

      Paid-in Capital in Excess

      of Par-common ($100,000 – $15,000) 85,000

Issued common stock in exchange for a building

 
 

22  

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.

 
 

23  

Objective 3 

Prepare the Stockholders’

Equity Section of a

Corporation Balance Sheet

 
 

24  

Paid-in Capital:

Preferred stock, 5%, $100 par,

5,000 authorized, 400 shares  issued    $40,000

Paid-in capital in excess of par–preferred     14,000

Total paid-in capital, preferred stockholders  $54,000  

Review of Accounting 
for Paid-In Capital 

Stockholders’ Equity

 
 

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Paid-in Capital:

Common Stock, $10 par, 20,000 shares

authorized, 4,500 issued       $  45,000

Paid-in capital in excess of par–common      72,000

Total paid-in capital        $171,000

Retained earnings             85,000

Total stockholders’ equity      $256,000 

Review of Accounting 
for Paid-In Capital 

Stockholders’ Equity

 
 

26  

Review of Accounting 
for 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.

 
 

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Review of Accounting 
for 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.

 
 

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Dividend Dates 

• A corporation must declare a dividend before paying it.
• The board of directors alone has the authority to declare a dividend.

 
 

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Dividend Dates 

Declaration date 

Date of record 

Payment date 

Three relevant dates for dividends are:

 
 

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Objective 4 

Account for Cash Dividends

 
 

31  

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.

 
 

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Cash Dividends Example 

June 15

Dividends Payable   60,000

      Cash         60,000

Paid a cash dividend 

April 1

Retained Earnings   60,000

      Dividends Payable     60,000

Declared a cash dividend

 
 

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Cash Dividends Example 

Preferred stock, 6%, 1,000 shares, $100 par 

Common stock, 25,000 shares, $100 par 

$50,000 dividends declared

 
 

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Cash Dividends Example 

Preferred dividend

6% × $100 ×1,000 = $6,000 

Common dividend

$50,000 – $6,000 = $44,000

 
 

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Preferred dividend

6% × $100 ×10,000 = $60,000 

Suppose there were 10,000,

6%, par value preferred shares 

Common shareholders receive nothing 

Cash Dividends Example

 
 

36  

Cumulative and Noncumulative 
Preferred 

• 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.

 
 

37  

Objective 5 

Use Different Stock Values

in Decision Making

 
 

38  

Stock Values 

• The business community refers to different stock values in addition to par value.
• market value
• book value

 
 

39  

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

 
 

40  

Stock Values Example 

Paid-in Capital:

Common Stock, $20 par value, 10,000 shares

authorized, issued, and outstanding     $200,000

Paid-in capital in excess of par–common     100,000

Total paid-in capital         $300,000

Retained earnings            100,000

Total stockholders’ equity       $400,000 

Book value per share: $400,000 ÷ 10,000 = $40 

Stockholders’ Equity

 
 

41  

Objective 6 

Evaluate Return

on Assets and Return on

Stockholders’ Equity

 
 

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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

 
 

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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 earned

from the common stockholders’

investment in the company

 
 

44  

Objective 7 

Account for the Income Tax

of a Corporation

 
 

45  

Accounting for Income Taxes 
by 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

 
 

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Accounting for Income Taxes 
by 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.

 
 

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Q1: Which characteristic of a corporation is a disadvantage?  

1. Double taxation
2. Mutual agency
3. Limited liability
4. Ease of transferring ownership

 

REVISION QUESTIONS 

Answer:  A

 
 

48  

Q2: Which corporate characteristic is an advantage? 

1. Double taxation
2. Ownership and management are separate
3. Limited liability
4. Government regulation

 

Answer: C

 
 

49  

Q3: The document used by a state to grant permission to form a corporation is called a:  

1. proxy
2. stock certificate
3. bylaw agreement
4. charter

 

Answer:  D

 
 

50  

Q4: All of the following transactions increase stockholders’ equity except:  

1. profitable operations
2. declaration of a cash dividend
3. issuance of common stock
4. issuance of preferred stock

 

Answer: B

 
 

51  

Q5: A corporation issues 1,000 shares of $1 par common stock for $2 per share. The journal entry does not include: 

1. Debit cash for $2,000
2. Credit Common Stock for $1,000
3. Credit Retained Earnings for $1,000
4. Credit Paid-in Capital in Excess of Par for $1,000

 

Answer:  C

 
 

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Q6: Land is acquired by issuing 1,000 shares of $10 par value stock. The land has a current market value of $15,000.  The journal entry requires a:  

1. Debit to Land of $10,000
2. Credit to Paid-in Capital in excess of Par, $5,000
3. Credit to Paid-in Capital in excess of Par, $15,000
4. Credit to Land of $5,000

 

Answer:  B 

 
 

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Q7: Given the following account balances as of December 31, 20xx: 
 
Cash $1,500 
Common stock, $1 par 2,000 
Retained Earnings 1,500 
Paid-in Capital in excess of par 4,000 
 
What is the total value of Stockholder Equity?

 
 

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Answer: 
 
Common stock, $1 par $2,000 
Retained Earnings 1,500 
Paid-in Capital in excess of par 4,000 
 $7,500

 
 

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Q8: On May 15, 20XX, Cojo Corporation declared a cash dividend of $1 per share for 1,000 shares of common. Which is the proper journal entry?  

1. Debit Dividend Declared, Credit Dividend Payable
2. Debit Retained Earnings, Credit Dividend Declared
3. Debit Declared Dividend, Credit Retained Earnings
4. Debit Retained Earnings, Credit Dividends Payable

 

Answer:   D

 
 

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Q9: Roger Corporation paid no dividend last year. The company has 1,000 shares of common stock and 100 shares of $2 cumulative preferred outstanding. This year, Roger declares a dividend of $2,000. 
 
How much of the dividend goes to the common stockholders?

 
 

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Answer:  Answer: $1,600 
 
Preferred shareholders get $200 for last year, and $200 for this year. 
 
Common shareholders get the rest.

 
 

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Q10: Stone Corporation has 100 shares of preferred stock, with Par value of $10. There are no preferred unpaid dividends. There are 2,000 shares of common outstanding. Total Stockholder equity totals $10,000. What is the book value of a share of common?

 
 

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Answer:  $4.50

Stockholders’ equity – Amounts attributable to preferred

   # common shares outstanding 

$10,000 – (100 x $10)

2,000 Shares

=

$4.50