1. ACCT 202 LECTURE 2 Corporations: Paid-in Capital and the Balance Sheet
Chapter 13

2. Lecture Objectives Identify the Characteristics of a Corporation
Record the Issuance of Stock
Prepare the Stockholders’ Equity Section of a Corporation Balance Sheet
Account for Cash Dividends
Use Different Stock Values in Decision Making
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. Owners’ equity in the corporation
Stockholders’ Equity
Owners’ equity in the corporation
has two components:
Paid-in capital
Retained earnings

9. Stockholders’ Equity Example
On June 1, the Bloom’s Corporation
issued stock valued at $10,000.
June 1
Cash ,000
Common Stock ,000
Issued stock

10. Stockholders’ Equity Example
Bloom’s Corporation net income
for the year was $800,000.
December 31
Income Summary 800,000
Retained Earnings ,000
To close net income to Retained Earnings

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

12. 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.

14. 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.

16. The shares were issued at par of $1.
Issuing Stock Example
The shares were issued at par of $1.
January 13
Cash (10,000 $1) 10,000
Common Stock ,000
Issue common stock at par

17. The shares were issued at a premium
Issuing Stock Example
The shares were issued at a premium
of $9 per share.
January 13
Cash (10,000 $10) 100,000
Common Stock ,000
Paid-in Capital in
Excess of Par-common ,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 $10) 100,000
Common Stock ,000
Paid-in Capital in
Excess of Stated Value ,000
Issue common stock at a premium

19. Assume the shares were no-par common stock.
Issuing Stock Example
Assume the shares were no-par common stock.
January 13
Cash (10,000 $10) 100,000
Common Stock ,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 $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. Prepare the Stockholders’ Corporation Balance Sheet
Objective 3
Prepare the Stockholders’
Equity Section of a
Corporation Balance Sheet

24. Review of Accounting for Paid-In Capital
Stockholders’ Equity
Paid-in Capital:
Preferred stock, 5%, $100 par,
5,000 authorized, 400 shares issued $40,000
Paid-in capital in excess of par–preferred ,000
Total paid-in capital, preferred stockholders $54,000

25. Review of Accounting for Paid-In Capital
Stockholders’ Equity
Paid-in Capital:
Common Stock, $10 par, 20,000 shares
authorized, 4,500 issued $ 45,000
Paid-in capital in excess of par–common ,000
Total paid-in capital $171,000
Retained earnings ,000
Total stockholders’ equity $256,000

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.

27. 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.

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

29. Three relevant dates for dividends are:
Dividend Dates
Three relevant dates for dividends are:
Declaration date
Date of record
Payment date

30. Account for Cash Dividends
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.

32. Cash Dividends Example
April 1
Retained Earnings 60,000
Dividends Payable ,000
Declared a cash dividend
June 15
Dividends Payable 60,000
Cash ,000
Paid a cash dividend

33. Cash Dividends Example
$50,000 dividends declared
Preferred stock, 6%, 1,000 shares, $100 par
Common stock, 25,000 shares, $100 par

34. Cash Dividends Example
Preferred dividend
6% × $100 ×1,000 = $6,000
Common dividend
$50,000 – $6,000 = $44,000

35. 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

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. Use Different Stock Values
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. Book value per share: $400,000 ÷ 10,000 = $40
Stock Values Example
Stockholders’ Equity
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 ,000
Total paid-in capital $300,000
Retained earnings ,000
Total stockholders’ equity $400,000
Book value per share: $400,000 ÷ 10,000 = $40

41. Objective 6
Evaluate Return
on Assets and Return on
Stockholders’ Equity

42. 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

43. 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. Account for the Income Tax
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

46. 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.

47. Q1: Which characteristic of a corporation is a disadvantage?
REVISION QUESTIONS
Q1: Which characteristic of a corporation is a disadvantage?
Double taxation
Mutual agency
Limited liability
Ease of transferring ownership
Answer: A

48. Q2: Which corporate characteristic is an advantage?
Double taxation
Ownership and management are separate
Limited liability
Government regulation
Answer: C

49. Q3: The document used by a state to grant permission to form a corporation is called a:
proxy
stock certificate
bylaw agreement
charter
Answer: D

50. Q4: All of the following transactions increase stockholders’ equity except:
profitable operations
declaration of a cash dividend
issuance of common stock
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:
Debit cash for $2,000
Credit Common Stock for $1,000
Credit Retained Earnings for $1,000
Credit Paid-in Capital in Excess of Par for $1,000
Answer: C

52. Q6: Land is acquired by issuing 1,000 shares of $10 par value stock
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:
Debit to Land of $10,000
Credit to Paid-in Capital in excess of Par, $5,000
Credit to Paid-in Capital in excess of Par, $15,000
Credit to Land of $5,000
Answer: B

53. Q7: Given the following account balances as of December 31, 20xx: Cash
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?

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

55. Answer: D Debit Dividend Declared, Credit Dividend Payable
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?
Debit Dividend Declared, Credit Dividend Payable
Debit Retained Earnings, Credit Dividend Declared
Debit Declared Dividend, Credit Retained Earnings
Debit Retained Earnings, Credit Dividends Payable
Answer: D

56. Q9: Roger Corporation paid no dividend last year
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?

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

58. 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?

59. Stockholders’ equity – Amounts attributable to preferred
Answer: $4.50
Stockholders’ equity – Amounts attributable to preferred
# common shares outstanding
$10,000 – (100 x $10)
2,000 Shares =
$4.50