Corporations: Paid-in Capital and the Balance Sheet pot

Corporations: Paid-in
Capital and the Balance
Sheet
Chapter
13

Objective 1
Identify the Characteristics
of a Corporation.

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

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
Paid-in capital
Paid-in capital
Retained earnings
Retained earnings
Owners’ equity in the corporation
has two components:

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

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 10,000
Issue common stock at par

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) 100,000
Common Stock 100,000
Issue no-par common stock

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.

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