Corporations: Paid-in
Capital and the Balance
Sheet
Chapter 13
Objective 1
Identify the Characteristics
of a Corporation.
Characteristics
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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
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.
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.
Authority Structure
in a Corporation
Stockholders
Board of Directors
Chairperson of the Board
President
Various Vice-Presidents and Secretary
Controller
Treasurer
Capital Stock
• 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.
Stockholders’ Equity
Owners’ equity in the corporation
has two components:
Paid-in capital
Retained earnings
Stockholders’ Equity Example
On June 1, the Bloom’s Corporation
issued stock valued at $10,000.
June 1
Cash
Common Stock
Issued stock
10,000
10,000
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
Stockholders’ Rights
• The ownership of stock entitles stockholders
to four basic rights, unless specific rights are
withheld by agreement.
1 Vote
2 Dividends
3 Liquidation
4 Preemption
Classes of Stock
• Common stock is the most basic form of
capital stock.
• Preferred stock gives its owners certain
advantages over common stockholders.
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.
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.
Objective 2
Record the Issuance of Stock.
Issuing Stock Example
• On January 13, Martin Corporation, which
manufactures skateboards, issues 10,000
shares of common stock for $10 per share.
Issuing Stock Example
The shares were issued at par of $1.
January 13
Cash (10,000 shares @ $1) 10,000
Common Stock
Issue common stock at par
10,000
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
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
Issuing Stock Example
Assume the shares were no-par common stock.
January 13
Cash (10,000 shares @ $10)
Common Stock
Issue no-par common stock
100,000
100,000
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?
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
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.
Objective 3
Prepare the Stockholders’
Equity Section of a
Corporation Balance Sheet.
Review of Accounting
for Paid-In Capital
Stockholders’ Equity
Paid-in Capital:
Preferred stock, 5%, $100 par,
5,000 authorized, 400 shares issued
Paid-in capital in excess of par–preferred
Total paid-in capital, preferred stockholders
$40,000
14,000
$54,000
Review of Accounting
for Paid-In Capital
Stockholders’ Equity
Paid-in Capital:
Common Stock, $10 par, 20,000 shares
authorized, 4,500 issued
Paid-in capital in excess of par–common
Total paid-in capital
Retained earnings
Total stockholders’ equity
$ 45,000
72,000
$171,000
85,000
$256,000
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.
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.
Dividend Dates
• A corporation must declare a dividend
before paying it.
• The board of directors alone has the
authority to declare a dividend.
Dividend Dates
Three relevant dates for dividends are:
Declaration date
Date of record
Payment date
Objective 4
Account for Cash Dividends.
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.
Cash Dividends Example
April 1
Retained Earnings
60,000
Dividends Payable
Declared a cash dividend
June 15
Dividends Payable
Cash
Paid a cash dividend
60,000
60,000
60,000
Cash Dividends Example
$50,000 dividends declared
Preferred stock, 6%, 1,000 shares, $100 par
Common stock, 25,000 shares, $100 par
Cash Dividends Example
Preferred dividend
6% × $100 ×1,000 = $6,000
Common dividend
$50,000 – $6,000 = $44,000
Cash Dividends Example
Suppose there were 10,000,
6%, par value preferred shares
Preferred dividend
6% × $100 ×10,000 = $60,000
Common shareholders receive nothing.
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.
Objective 5
Use Different Stock Values
in Decision Making.
Stock Values
• The business community refers to different
stock values in addition to par value.
– market value
– book value
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
Stock Values Example
Stockholders’ Equity
Paid-in Capital:
Common Stock, $20 par value, 10,000 shares
authorized, issued, and outstanding
Paid-in capital in excess of par–common
Total paid-in capital
Retained earnings
Total stockholders’ equity
$200,000
100,000
$300,000
100,000
$400,000
Book value per share: $400,000 ÷ 10,000 = $40
Objective 6
Evaluate Return
on Assets and Return on
Stockholders’ Equity.
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.
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.
Objective 7
Account for the Income Tax
of a Corporation.
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
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.
End of Chapter 13