Presentation is loading. Please wait.

Presentation is loading. Please wait.

Chapter 12 1. ADVANTAGES 1.Corporations can raise more money 2.Corporations have continuous life 3.Ownership transfer is easy 4.No mutual agency 5.Stockholders.

Similar presentations


Presentation on theme: "Chapter 12 1. ADVANTAGES 1.Corporations can raise more money 2.Corporations have continuous life 3.Ownership transfer is easy 4.No mutual agency 5.Stockholders."— Presentation transcript:

1 Chapter 12 1

2 ADVANTAGES 1.Corporations can raise more money 2.Corporations have continuous life 3.Ownership transfer is easy 4.No mutual agency 5.Stockholders have limited liability DISADVANTAGES 1.Ownership and management separated. 2.Double taxation 3.Government regulation is expensive 4.Start-up costs are higher 2

3 Authorization–State’s permission to operate Authorized stock–How many shares of a class of stock a corporation may issue Capital stock–Represents ownership of the corporation's capital Stock certificate–Paper evidencing ownership in a corporation Company name Stockholder name Number of shares owned Outstanding stock–Stock held by stockholders 3

4 4

5 Paid-in capital (Contributed capital) Amounts received from stockholders Common stock is main source Externally generated Resulting from transactions with outsiders Retained earnings Earned by profitable operations Internally generated Results from internal corporate decisions to retain net income for use in the company 5

6 Common stock Four basic rights Vote—voting on corporate matters Dividends—receive a proportionate part of dividend declared Liquidation—receive a proportionate part of assets remaining Preemption—maintain their proportionate ownership Preferred stock Certain advantages over common stock Receive dividends before common Fixed dividend amount Upon liquidation, receive assets before common Also have basic rights of common stockholders unless withheld 6

7 Par value Arbitrary amount assigned to a share of stock Set when the corporate charter is filed Usually set low as to avoid legal difficulties No-par No arbitrary amount assigned Could have a stated value Stated value treated as par 7

8 Sell directly to stockholders Use an underwriter/brokerage firm Buys unsold stock Issue price–price received for issuing stock Usually exceeds par value Stock exchange– here public company stock is traded NYSE–New York Stock Exchange NASDQ 8

9 Issuing 1,000,000 common stock ($1 par) at par 9

10 Issuing common stock($1 par) above par Amount received above par is called a premium Not a gain; called additional paid-in capital Another account is created for the premium amount 10

11 Stockholders’ Equity Presentation The balance of the Common stock account is calculated 11 Total Paid-in capital is the sum of Common stock plus Paid-in capital in excess of par

12 No-par stock No Paid-in capital in excess of par account needed Full amount received is credited to Common stock Balance sheet shows only the Common stock account 12

13 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 13 Stated value

14 Issuing stock for assets other than cash Asset is debited for its fair value Building is debited instead of cash 14

15 Issuing preferred stock Similar to issuing common stock, except Preferred stock is credited at par value 15

16 Preferred stock usually is not issued above par 16

17 Equity accounts are listed in the following order on the balance sheet: Preferred stock, Common stock, Retained earnings 17

18 Scifilink.com issued stock beginning in 2012 and reported the following on its balance sheet at December 31, 2012: Common stock, $ 2.00 par value Authorized: 6,000 shares Issued: 4,000 shares $ 8,000 Paid-in capital in excess of par 4,000 Retained earnings 26,500 Requirement: Journalize the company’s issuance of the stock for cash. 22

19 19 Journal Entry DATE ACCOUNTS DEBITCREDIT Dec 31 Cash12,000 Common stock8,000 Paid in capital in excess of par4,000 Common stock, $ 2.00 par value Authorized: 6,000 shares Issued: 4,000 shares $ 8,000 Paid-in capital in excess of par 4,000 Retained earnings 26,500

20 Susie Systems completed the following stock issuance transactions: May 19 Issued 2,000 shares of $1 par common stock for cash of $9.50 per share. June 3 Sold 300 shares of $3, no-par preferred stock for $15,000 cash. June 11 Received equipment with market value of $78,000. Issued 3,000 shares of the $1 par common stock in exchange. Requirements: 1. Journalize the transactions. Explanations are not required. 2. How much paid-in capital did these transactions generate for Susie Systems? 20

21 Susie Systems completed the following stock issuance transactions: May 19 Issued 2,000 shares of $1 par common stock for cash of $9.50 per share. 21 Journal Entry DATE ACCOUNTS DEBITCREDIT May 19 Cash19,000 Common stock2,000 Paid in capital in excess of par17,000

22 Susie Systems completed the following stock issuance transactions: June 3 Sold 300 shares of $3, no-par preferred stock for $15,000 cash. 22 Journal Entry DATE ACCOUNTS DEBITCREDIT Jun 3 Cash15,000 Preferred stock15,000

23 Susie Systems completed the following stock issuance transactions: June 11 Received equipment with market value of $78,000. Issued 3,000 shares of the $1 par common stock in exchange. 23 Journal Entry DATE ACCOUNTS DEBITCREDIT Jun 11 Equipment78,000 Common stock3,000 Paid in capital in excess of par75,000

24 24 2. How much paid-in capital did these transactions generate for Susie Systems? $112,000 19,000 issue of CS for Cash + 15,000 issue of PS for Cash + 78,000 stock issued for equipment with market value of 78,000

25 Closing entries Step 1 – Close Revenues Step 2 – Close Expenses 25

26 Closing entries Step 3 – Close Income summary 26

27 A loss causes Retained earnings to decrease A debit balance in Retained earnings is a deficit 27

28 A deficit is reported as a negative amount 28

29 Sometimes a state prohibits using Paid-in capital for dividends Legal capital is the portion of equity unavailable for dividends Dividends are declared before paying Three dates: Declaration date–Board declares a dividend and creates a liability Date of record–determines which stockholders receives dividends Payment date–pay dividends and remove liability 29

30 Preferred dividends expressed as either: A percent of par value Or a flat dollar amount per share Common dividends are expressed as a dollar amount per share 30 2,000 shares of $100 par 8% preferred = $16,000 dividend 2,000 shares of no-par $3 preferred = $6,000 dividend

31 Declaration date Date of Record (no entry) Payment date 31

32 32 Note: Preferred dividend per share ($50 x 6%) = $3 Annual preferred dividend is (2,000 shares x $3) = $6,000

33 Preferred stockholders receive dividends before common Common stockholders receive dividends if total declared is large enough to cover preferred 33

34 Cumulative 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 Dividend in arrears are paid first, then current dividends paid 34

35 Cumulative Preferred A company declares $50,000 for dividends In arrears, 1 year at $6,000 Preferred gets $6,000 in arrears + $6,000 current Common receives the remainder Distribution if Preferred is Noncumulative Preferred$6,000 Common$44,000 35

36 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 share of stock If preferred stock exists, subtract preferred equity from total equity to compute book value of common shares 36

37 Book value attributed to preferred stock + any preferred dividends that are in arrears Book value attributed to preferred stock is either the number of outstanding preferred shares times liquidation value per share, OR the book value of preferred equity (the Preferred stock account balance) Plus any dividends that are in arrears, if the preferred stock is cumulative. 37

38 Book value of preferred stock: Liquidation price or Preferred stock accountA Dividends in arrears on any outstanding preferred sharesB Total book value attributed to preferred stockA+B Number of outstanding preferred sharesC Book value per share of preferred stock(A+B)/C 38 Book value of common stock: Total stockholders’ equityD Less: book value attributed to preferredA+B Total book value attributed to common stockD-(A+B) Number of outstanding common sharesE Book value per share of common stockD- (A+B)/E

39 Bronze Tint Trust has the following stockholders’ equity: Bronze Tint has not declared preferred dividends for five years (including the current year). 39 Paid-in capital: Preferred stock, 5%, $10 par, 6,000 shares authorized, 4,500 shares issued $ 45,000 Common stock, $0.20 par, 1,200,000 shares authorized and issued 240,000 Paid-in capital in excess of par—common400,000 Total paid-in capital$685,000 Retained earnings255,000 Total stockholders’ equity$ 940,000

40 Compute the book value per share of Bronze Tint’s preferred and common stock. 40 Preferred stock Par value of Preferred stock$45,000 Cumulative dividends11,250 Total book value attributed to preferred stock 56,250 Number of outstanding preferred shares 4,500 Book value per share of preferred stock $12.50

41 Compute the book value per share of Bronze Tint’s preferred and common stock. (*$ rounded) 41 Common stock Total stockholders’ Equity$940,000 Less: Preferred equity(56,250) Common equity $883,750 Number of outstanding Common shares 1,200,000 Book value per share of common stock * $0.74

42 Measures a company’s success in using assets 42

43 Relationship between net income available and their average common equity invested 43 Net income – Preferred dividends Average common stockholders’ equity

44 Godhi’s 2012 financial statements reported the following items—with 2011 figures given for comparison: 44

45 Compute Godhi’s rate of return on total assets and rate of return on common stockholders’ equity for Do these rates of return look high or low? 45 Rate of return on total assets = Net income + Interest expense Average total assets Rate of return on common stockholders’ equity = Net income – Preferred dividends Average common stockholders’ equity $3, / $31,550 = 13% ( ) $3, / $15,519 = 25.1% ( ) High

46 Federal tax rate of 35% when combined with State taxes can increase total taxes to 40% Corporations measure two income tax amounts Income tax expense–income statement based Income tax payable–IRS taxable income based Income tax expense Income before tax on the income statement x Income tax rate Income tax payable Taxable income from the IRS filed tax return x Income tax rate Major difference–depreciation methods differ 46

47 Example Income before income tax of $33,000,000 $33,000,000 X 40% = $13,200,000 taxes Taxable income of $20,000,000 $20,000,000 X 40% = $8,000,000 IRS taxes Difference is $5,200,000 $13,200,000 - $8,000,000 Deferred until taxable income catches up 47


Download ppt "Chapter 12 1. ADVANTAGES 1.Corporations can raise more money 2.Corporations have continuous life 3.Ownership transfer is easy 4.No mutual agency 5.Stockholders."

Similar presentations


Ads by Google