Corporate Accounting: Formation and Paid-In Capital

Transcription

1 Ch.19 Corporate Accounting: Formation and Paid-In Capital Corporate Form of Business Paid-in Capital and Earned Capital Classification of Capital Stock Issuance of Capital Stock Stockholders Equity Reacquisition of Capital Stock 1

2 The Corporation A form of business that is owned by investors (AKA stockholders or shareholders) The investments held by stockholders are referred to as the capital stock Publicly held Corporation: a large corporation owned by many stockholders Closely held Corporation: a corporation owned by a small group of stockholders or a family Advantages of the Corporate Form Limited liability of owners Ease of raising capital Continuity of life Ease of transferring ownership No mutual agency Professional management 2 Disadvantages of the Corporate Form Additional taxation Increase government regulation

3 Organizational Structure of a Corporation Forming a Corporation The incorporators must file an application with the appropriate official in the state in which the business will be incorporated. The application is referred to as the articles of incorporation. The state grants the incorporators a charter. Charter: a contract between the state and the incorporators authorizing the corporation to conduct business. The incorporators agree to a set of bylaws, which act as the corporation s constitution. The incorporators hold a meeting of stockholders and elect a board of directors. 3

4 Organization Costs Costs associated with forming a corporation Attorneys fees State charter fees License fees Cost of printing the stock certificates Promotions costs Incurred before the corporation actually begins operations Expensed when incurred Assume Lori Hume incurred $4,500 of organizational costs on Jun. 25, 20X4. The following entry is prepared: 20X4 June 25 Organization Costs 4,500 4 Cash 4,500

5 Paid-in capital and earned capital The owner s equity in a corporation Represents the excess of total assets over total liabilities Is divided into paid-in capital and earned capital o Paid-in capital comes from the stockholders thru the purchase of o the company s stock. Earned capital arises from profitable operations and is referred to as retained earnings. 5 Used to record sales of the company s stock Used to record earnings in the past periods that have not been distributed to stockholders

6 Capital Stock The general term used to describe the shares of ownership in a corporation Authorized Stock: the maximum number of shares the corporation is permitted to sell Issued Stock: shares that have been sold to stockholders The number of shares issued may not be more than the number of shares authorized On occasion, a corporation may buy back some of the shares that were issued at an earlier date These reacquired shares are held in the corporate treasury and are referred to as treasury stock Treasury shares are still considered to be issued, but they are not considered to be outstanding 6 Outstanding Stock The difference between the number of shares issued and the number of treasury shares The number of shares actually in the hands of the stockholders

7 Stock Trading Diagram 7

8 Common Stock The stock issued if a corporation issues only one type of stock The basic rights and privileges of common stockholders The right to share in distribution of earnings when declared by the board of directors The right to vote The right to maintain their proportionate ownership share of the corporation if the corporation issues additional shares of stock, called the preemptive right The right to share in the final distribution of assets if the corporation is liquidated Preferred Stock The type of stock issued when a corporation issues a class of stock in addition to common Preferred stock has preference over common stock in two ways: A prior claim to dividends when declared by the board of directors A prior claim to assets should the corporation find it necessary to liquidate 8

9 Cumulative and Noncumulative Preferred Stock 9 Corporations are under no legal obligation to pay a dividend to stockholders. When a dividend isn t declared by a corporation, it is said to be passed. Cumulative Preferred Stock retains rights to passed dividends. These unpaid dividends, called dividends in arrears, must be paid in full before any dividend is paid to common stockholders. If stockholders own noncumulative preferred stock, their passed dividends do not accumulate. Most preferred stock is cumulative.

10 Participating and Nonparticipating Preferred Stock Preferred stock usually has a stated or fixed dividend rate. Some preferred stock is allowed to receive dividends in excess of a fixed amount, and is referred to as participating preferred stock. Holders of participating preferred stock first get their regular dividend. If an amount is left after the common stockholders receive a dividend, the preferred stockholders can participate with the common stockholders in the extra dividend. Most preferred stock is nonparticipating. 10

11 Issuing Capital Stock Par Value Stock: stock for which a fixed dollar amount is designated in the corporate charter as the value of each share No-par Value Stock: stock without a fixed dollar amount assigned to each share Stated Value Stock: no-par stock with a value assigned to it There is little difference between accounting for par value stock and for stated value stock Selling Stock at Par Value for Cash Example: On Jan. 15, 20X1, Ace Trucking, Inc., issued 2,000 shares of preferred stock and 10,000 shares of common stock at par for cash. The preferred stock has a par value of $100 and the common stock has a par value of $10. 20X1 Jan. 15 Cash 300,000 Preferred Stock 200, Common Stock 100,000

12 Issuing Stock at Par Value for Noncash Assets On Jan. 18, 20X1, Ace Trucking, Inc., issued 500 shares of common stock at par to an attorney for services received in obtaining the corporation charter. The common stock has a par value of $10. Ace records the following journal entry: 20X1 Jan. 18 Organization Costs 5,000 Common Stock 5,000 Selling Stock Above Par Value for Cash When the market price of stock exceeds its par value, the stock is said to sell for a premium Premium: the amount by which the issue price exceeds the par value On May 15, 20X1, Ace Trucking, Inc., issued 500 shares of preferred stock at $102 per share. The preferred stock has a par value of $100. Ace records the following journal entry: 12 20X1 May 15 Cash 51,000 Preferred 50,000 Paid-in Capital In Excess of Par-Preferred 1,000

13 Issuing Stock Above Par Value in Exchange for Noncash Assets When noncash assets are received in exchange for capital stock, the assets acquired should be recorded at their fair market value. Assume on Jun. 20, 20X1, Ace Trucking, Inc. issued 5,000 shares of common stock and accepted land and a building. The land has a fair market value of $10,000 and the building has a fair market value of $70,000. The common stock has a par value of $10. Ace records the following journal entry: 20X1 Jun. 20 Land 10,000 Building 70,000 Common Stock 50, Paid-in Capital In Excess of Par-Common 30,000

14 Issuing Stock Below Par Value If stock is sold for an amount below its par value, the stock is said to sell at a discount. The issuance of stock below par value is very rare and is not allowed in many states. On Oct. 15, 20X0, Binker, Inc. issues 500 shares of $10 par common stock for $8 per share. Binker records the following journal entry: 20X0 Oct. 15 Cash 4,000 Discount on Common Stock 1,000 Common Stock 5,000 14

15 Stockholders Equity Section of the Balance Sheet Using all the transactions recorded for Ace Trucking, Inc., we can prepare the Stockholders Equity section of the balance sheet. Assume on the date of the balance sheet, Ace Trucking has a $40,000 credit balance in its Retained Earnings account. 15 J. WU To this point, the total capital invested in the company is $556,000.

16 Issuing No-Par Value Stock On Mar. 23, 20X8, Sterling Corporation issues 5,000 shares of no-par common stock for $50 per share. Sterling records the following journal entry: 20X8 23 Cash 250,000 Mar. Common Stock 250,000 Issuing Stated Value Stock No-par stock is sometimes issued with a stated value. The stated value of the shares outstanding then becomes the legal capital of the corporation. On Dec. 18, 20X1, Buker Corporation issued 300 shares of $15 stated value stock for $17 a share. Buker records the following journal entry: 16 20X1 Dec. 1 8 Cash 5,100 Common Stock 4,500 Paid-in Capital In Excess of Stated Value 600

17 Stock Subscriptions Corporations may sell stock on a subscription, or installment, basis. The company enters into a contract with a subscriber to purchase a specified number of shares at a specified price. The shares will be issued only when the full contract price has been received from the subscriber. The subscription price is debited to an asset account entitled Subscriptions Receivable. The par value of the subscribed shares is credited to an equity account entitled Stock Subscribed. On Jun. 1, 20X1, Ace Trucking enters into a stock subscription plan for 20,000 shares of $10 par common stock at $12 per share. Ace will receive three equal installments on June 1, July 1 and August 1. Ace records the following journal entries: 17

18 20X1 Jun. 1 Subscriptions Receivable 240,000 Common Stock Subscribed 200,000 Paid-in Capital in Excess of Par-Common 40,000 Jun. 1 Cash 80,000 Subscriptions Receivable 80,000 Jul. 1 Cash 80,000 Subscriptions Receivable 80,000 Aug. 1 Cash 80,000 Subscriptions Receivable 80,000 Aug. 1 Common Stock Subscribed 200,000 Common Stock 200,000 18

19 Treasury Stock The issued shares the corporation buys back from stockholders. Is like unissued stock in that it has no voting rights, no dividend rights, and no right to share in assets if the corporation liquidates. A corporation cannot buy its own unissued stock, nor can a corporation own part of itself. A corporation can buy back from stockholders issued shares of stock. We use the cost method to account for the purchase of treasury stock and ignore the original selling price of the stock. Assume on Jan. 4, 20X2, Ace Trucking, Inc. buys back 1,000 shares of its common stock for $15 per share. The common stock had a par value of $10 per share. On Mar. 15, 20X2, Ace sold 500 shares of the treasury stock for $20 each. On Apr. 28, 20X2, Ace sold 200 shares of treasury stock for $14 each. 19

20 20X2 Jan. 4 Treasury Stock 15,000 Cash 15,000 Mar. 15 Cash 10,000 Treasury Stock 7,500 Paid-in Capital from Sale of Treasury Stock 2,500 Apr. 28 Cash 2,800 Paid-in Capital from Sale of Treasury Stock 200 Treasury Stock 3,000 20

21 Reporting Treasury Stock on the Balance Sheet The balance of Paid-in Capital from Sale of Treasury Stock is reported in the Paid-in Capital section of the balance sheet. The balance of the Treasury Stock account is deducted from the total of the paid-in capital and retained earnings. 21

22 Controlling Accounts and Subsidiary Ledgers Controlling Account Common Stock Preferred Stock Subscriptions Receivable Subsidiary Ledger Common Stockholders Ledger Preferred Stockholders Ledger Subscribers Ledger 22