NAME:
College Accounting
Chapter 13—Corporations: Paid-In Capital and the Balance Sheet
Structured Notes
Corporations dominate business activity in the United States. ____________________ and
________________________________ are more numerous, but __________________________ do
more business and are larger.
OBJECTIVE #1: Identify the characteristics of a corporation.
Separate Legal Entity
A corporation is a _________________________________________________________________
_____________________________________________________________________________
A corporation’s owners are called ____________________________ or ______________________
Continuous Life and Transferability of Ownership
The owners’ equity of a corporation is divided into _______________________________________ .
A corporation has continuous life regardless of __________________________________________ .
No Mutual Agency
Mutual agency means that __________________________________________________________ .
Mutual agency operates in ___________________________ but NOT in _____________________ .
Limited Stockholder Liability
Stockholders have _________________________________ for corporation debts. That means they
have ____________________________________________________________________________ .
The most a stockholder can lose on an investment in a corporation is the ______________________
_____________. In contrast, proprietors and partners are personally liable for _________________
___________________________________, unless the partnership is a _______________________
Separation of Ownership and Management
A board of directors—elected by ____________________________--appoints the officers to manage
the business.
Corporate Taxation
Corporations are separate ___________________________. Corporations are subject to double
taxation:
* ______________________________________________________________________________
* ______________________________________________________________________________
NAME:
Proprietorships and partnerships pay no business ______________________. Instead the tax falls
solely on _________________________________.
Government Regulation
Because of stockholders’ limited ______________________, outsiders can look no further than the
__________________________ for payment of its debts. To protect persons who do business with
corporations, ___________________________________ monitor corporations.
Advantages and Disadvantages of a Corporation
Advantages
Disadvantages
1.
1.
2.
2.
3.
3.
4.
5.
ORGANIZING A CORPORATION
Organizing a corporation begins when _________________________________________________
________________________________________________________________________________ .
The charter authorizes the corporation to issue a _________________________________________
The incorporators pay _______, sign the ____________________, and file ___________________ ;
then the corporation becomes a ______________________________________________________ .
The stockholders agree to a set of _____________________________, which act as their constitution.
Ultimate control of the corporation rests with the stockholders as they vote their _______________
___________________ Each share of stock carries ________ vote.
The stockholders elect the board of directors, which
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
NAME:
CAPITAL STOCK
A corporation issues ___________________________ to the stockholders when they buy the stock.
The stock represents the corporation’s _____________________, so it is called ________________ .
The basic unit of stock is a ____________________________
The certificate shows the:
* ______________________________________________________________________________
* ______________________________________________________________________________
* ______________________________________________________________________________
Stock that is held by the stockholders is said to be _____________________.
STOCKHOLDERS’ EQUITY BASICS
A corporation reports assets and liabilities exactly as for a _____________________________ or a
_____________________________.
But the owners’ equity of a corporation –called _______________________________________ is
reported differently. State laws require corporations to report their sources of capital because
________________________________________________________________________________
Two basic sources:
Paid-in capital (also called contributed capital) represents amounts ________________________
________________________________________________________________________________
Common Stock is the main __________________________________________________________
Retained earnings is ______________________________________________________________ .
Paid-in Capital Comes from the Stockholders
To record the receipt of cash and the issuance of stock:
_________________________ is debited
___________________________________ is credited
Issuing stock increases both ____________________ and _________________________________ .
Retained Earnings Come from _____________________________________________________
Profitable operations generate ______________________________, which increases ___________
Through a separate account called ____________________________________________________ .
A corporation needs at least two capital accounts:
* ______________________________________________________________________________
* ______________________________________________________________________________
To close Revenue account:
_______________________ is debited
NAME:
_____________________ is credited
To close Expenses,
____________________________ is debited
________________________________ is credited
Income Summary’s balance is closed to ________________________________________________ .
A Retained Earnings Deficit
A loss may cause a ___________________ balance in Retained Earnings and is reported as a negative
amount in ____________________________________________.
A Corporation May Pay Dividends to the Stockholders
A profitable corporation may distributed _____________________ to the stockholders. Such
distributions are called _____________________.
Dividends are similar to a proprietor’s ________________________________.
Dividends decrease both _________________________ and _______________________________ .
Most states prohibit using _________________________ for dividends.
__________________________________ is the term accountants use to refer to the portion of
stockholders’ equity that cannot be used for dividends.
A stockholder has four basic rights, unless a right is withheld by contract.
1. __________________. Each share of stock carries ________________________ vote.
2. ____________________. Each share of stock receives _____________________________ .
3. ____________________.
4. _______________________(usually withheld because it is rarely exercised
Classes of Stock
Corporations can issue different classes of stock. The stock of a corporation may be either:
________________________________________________________________________________
________________________________________________________________________________
Common Stock and Preferred Stock
Every corporation issues _________________________, which represents the basic ownership of the
corporation. The owners are the _____________________________________________________.
NAME:
Some companies issues Class A common stock, which carries the right to _______. They may also
issue Class B common stock, which may be ____________________.
There is a separate account for each ___________________________________________________ .
Preferred stock gives its owners _____________________________________________________ .
Most notably, preferred stockholders receive dividends before ______________________________ ,
and preferred receives assets before common if _________________________________________ .
Corporations pay a fixed dividend on __________________________________________________ .
Investors usually buy ____________________________________________ to earn those fixed
dividends.
Owners of preferred stock also have the four basic stockholder rights, unless a right is withheld. The
right to ______________ is sometimes withheld.
Par Value, Stated Value, and No-Par Stock
Stock may carry a ______________________ or it may be ___________________ stock
Par value is an ____________________________________________________________________
Most companies set par value low to avoid _____________________________________________
________________________________________________________________________________ .
Companies maintain a minimum amount of stockholders’ equity for the ______________________
Of creditors, and this minimum represents the corporation’s legal ___________________________ .
Legal capital is usually the __________________________________________________________
Par value is used to compute ________________________________________________________ .
No-par stock does not have __________________________________________________________ .
Some no-par stock has a ______________________________, which makes it similar to ________
________________________. The stated value is an arbitrary amount similar to _______________ .
ISSUING STOCK
OBJECTIVE #2: Record the issuance of stock
A company can sell its stock directly to stockholders or it can use the services of an _____________ .
The price that the corporation receives from issuing stock is called the _______________________ .
Usually the issue price ___________________ par value because par value is quite low.
Issuing Common Stock
The ads for advertising stock are called ________________________________________________ .
NAME:
Issuing Common Stock at Par
______________________ is debited
_________________________ is credited to issue common stock at par
Issuing Common Stock at a Premium
Most corporations set par value low and issue common stock for a price ______________________ .
The amount above par is called a ______________________________
A premium on the sale of stock is NOT a _____________, _______________________, or
__________________ for the corporation because _______________________________________ .
A company can have not profit or loss when ____________________________________________ .
To issue common stock at a premium,
____________________________________ is debited
____________________________________________ is credited
_____________________________________________________________ is credited
COMMON STOCK BALANCE = ______________________________ X ______________________
Paid in Capital in Excess of Par = ________________________________ x _____________________
Total paid-in capital = ____________________________________ + __________________________
ISSUING NO-PAR STOCK
When a company issues no-par stock, it debits the ___________________________ and credits the
__________________________.
ISSUING NO PAR STOCK WITH A STATED VALUE
Accounting for no-par stock with a stated value is identical to accounting for __________________
Stock. No-par stock with a stated value uses an account titled ______________________________
______________________________________.
ISSUING STOCK FOR ASSETS OTHER THAN CASH
If a corporation issues stock for assets other than cash, (equipment and building),
______________________________ is debited
______________________________ is debited
__________________________________________ is credited
__________________________________________ is credited
NAME:
ISSUING PREFERRED STOCK
To issue preferred stock,
_______________________________ is debited
____________________________________ is credited
ETHICAL CONSIDERATIONS
A company is supposed to record an asset received at its __________________________________
OBJECTIVE #3: Prepare the stockholders’ equity section of a corporation balance sheet.
The order of equity accounts:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
ACCOUNTING FOR CASH DIVIDENDS
Corporations declare dividends from __________________________________________________
DIVIDEND DATES
A corporation declares a dividend before paying it. Three dividend dates are relevant:
1. Declaration Date. On the declaration date, the board of directors _________________________
________________________________________________________________________________
The declaration of a cash dividend creates a ______________________________________
2. Date of record. Those stockholders holding the stock on the date of records, will receive _____
__________________________________________________________________________
3. Payment date. Payment of the dividend usually follows the _____________________________
Objective #4: Account for cash dividends
DECLARING AND PAYING DIVIDENDS
The cash dividend rate on preferred stock is often expressed as a ____________________________
__________________________________________________________________________
But sometimes cash dividends on preferred stock are expressed as a _________________________ .
Preferred dividends are computed two ways, depending on _________________________________
__________________________________________________________________________
NAME:
Two ways to compute preferred dividends:
1. _________________________ x ___________________________ = ____________________
2. _________________________ x ___________________________ = ____________________
Cash dividends on common stock are computed the second way because ______________________
__________________________________________________________________________
The declaration of a cash dividend,
Debit _____________________________________________________________________
Credit ____________________________________________________________________
To pay the dividend,
Debit _____________________________________________________________________
Credit ____________________________________________________________________
Dividends Payable is a _____________________________________________________________
When a company has issued both preferred and common, the _______________________________
get their dividends first. The common stockholders receive dividends only if __________________
__________________________________________________________________________
DIVIDING DIVIDENDS BETWEEN PREFERRED AND COMMON
If a company’s dividends is large enough to cover the preferred dividend, the preferred stockholders
get their _________________________________________________________________________ ,
and the common stockholders get _____________________________________________________ .
But if the year’s dividend falls below the annual preferred amount, the preferred stockholders receive
________________________________________________________________________________
and the common stockholders get _____________________________________________________
DIVIDENDS ON CUMULATIVE AND NONCUMULATIVE PREFERRED
Preferred stock can be either:
________________________________ or _______________________________________
Preferred is ________________________ unless it’s specifically designated as noncumulative. Most
preferred stock is _________________________.
A corporation may fail to pay the preferred dividend. This is called _________________________
________________________, and the dividends are said to be _____________________________ .
Cumulative preferred must receive __________________________________________________
__________________________________________________________________________
If the preferred stock is noncumulative, the corporation need not ____________________________
NAME:
__________________________________________________________________________
Dividends in arrears are not a ________________________________.
Objective #5: Use different stock values in decision making
Market Value
Market value, or market price, is ____________________________________________________
________________________________________________________________________________
In almost all cases, stockholders are more concerned about ________________________________
________________________________________________________________________________
Book Value
Book value is the _________________________________________________________________
________________________________________________________________________________
If the company has only common stock outstanding, you can divide _________________________
________________________________________________________________________________
If the company has both preferred and common outstanding, _______________________________
has first claims to the equity. Therefore, _________________________________________
is subtracted from ___________________________________________________________
to compute book value per share of common.
EVALUATING OPERATIONS
To compare companies, we need some ________________________________________________ .
Two important ratios are ____________________________________________________________
and
__________________________________________________________________________ .
Objective #6: Rate of Return on Total Assets
The rate of return on total assets, measures a __________________________________________
________________________________________________________________________________
Two groups invest money to finance a corporation:
_________________________________ and ___________________________________________
Rate of Return
On total Assets
=
NAME:
Net Income and interest expense are taken from the ______________________________________ .
Average total assets comes from the __________________________________________________ .
In most industries a _________________ return on assets is considered good.
RATE OF RETURN ON COMMON STOCKHOLDERS’ EQUITY
Rate of return on common stockholders’ equity shows the relationship between _________________
___________________________________________________ and their average common equity.
Rate of Return
On Common
Stockholders’ Equity
=
Most companies strive for return on equity of _____________% or higher.
If return on assets ever exceeds return on _________________________, the company is in trouble.
Because the company’s interest expense is ___________________________ than its return on equity.
Return on assets should always be significantly lower than _________________________________ .
ACCOUNTING FOR INCOME TAXES BY CORPORATIONS
Objective #7: Account for the income tax of a corporation
To account for income tax, a corporation measures two income tax amounts:
__________________________________
__________________________________
Income Tax Expense
=
X
Income Tax Payable
=
X
The income statement and the ___________________________________ are entirely separate
documents. The tax return is new. It reports ___________________________________________ .
For most companies, income tax expense and income tax payable __________________. The most
important difference occurs when ____________________________________________________
________________________________________________________________________________