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Chapter 11
Review the characteristics of a corporation
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ADVANTAGES DISADVANTAGES
Ability to raise money
Continuous life Easy to transfer
ownership No mutual agency Limited liability
Separation of ownership and management
Double taxation Expensive
government regulation
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State authorizes how many shares of stock a corporation may issue through corporate bylaws
Corporation issues stock certificates when stockholders buy stock
Stock held by stockholders is outstanding
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Describe the two sources of stockholders’ equity and the classes of stock
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Paid-in capital Retained earnings
Amounts received from stockholders
Common stock is main source
Externally generated Resulting from
transactions with outsiders
Earned by profitable operations
Internally generated Results from internal
corporate decisions and earnings
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Common stock Preferred stock
Basic form of capital stock
Owners have certain advantages over common
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Par value No-par
Arbitrary amount assigned by company to a share of stock
Usually set low as to avoid legal difficulties
No arbitrary amount assigned by company to a share of stock
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Journalize the issuance of stock and prepare the stockholders’ equity section of a
corporation balance sheet
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Issue stock at parGENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Cash
Common stock
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11
Issue stock at a premiumGENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Cash
Common stock
Paid-in capital in excess of par
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Paid-in capital
Common stock
Par
Paid-in capital in excess of par
Amount received over par
CashAmountreceived
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No-par stock Stated value stock
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Issuing stock for noncash assets Issuing preferred stock
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Equity accounts are listed in the what order on the balance sheet?
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Stockholders' Equity
Preferred stock, 6%, $50 par, 2000 shares authorized and issued 100,000$
Paid-in capital in excess of par - preferred 5,000
Common stock, $1 par, 1,000,000 shares authorized, 500,000 issued 500,000
Paid-in capital in excess of par - common 750,000
Total paid-in captial 1,355,000
Retained earnings 715,000 Total stockholders' equity 2,070,000$
Any CompanyBalance Sheet
December 30, 2010
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GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Oct 19 Cash (1300 x $12) 15,600
Common stock 1,300
Paid-in capital in excess of par-C/S
14,300
Nov
3 Cash 10,000
Preferred stock 10,000
Nov
11 Equipment 18,000
Common stock 6,000
Paid-in capital in excess of par-C/S
12,00017
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Total paid-in capital =
$12,000$12,000
$1,300$1,300
$6,000$6,000
$14,300$14,300 $10,000$10,000
$43,600
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Illustrate Retained earnings transactions
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Income summary
Retained earnings
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Income SummaryRevenuesExpenses
Net Income
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If a company incurs a loss, Retained earnings is decreased
A debit balance in Retained earnings is called a deficit
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Account for cash dividends
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Preferred dividends expressed as either:◦ A percent of par value
◦ Or a flat dollar amount per share
Common dividends expressed as a dollar amount per share
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Retained earnings
Dividends payable
Declaration of cash dividend
Dividends payable
Cash
Payment of cash dividend
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Preferred stockholders receive dividends before common
Common stockholders will only receive dividends if total declared is large enough
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A corporation has the following shares outstanding:
10,000 shares of $50 par, 6% preferred stock50,000 share of $1 par common stock
Situation 1: A $50,000 cash dividend is declared
Preferred dividend = 10,000 x $50 x 6% = $30,000
Preferred dividend = 10,000 x $50 x 6% = $30,000
Preferred receives $30,000
Common receives $20,000
Preferred receives ?
Situation 2: A $25,000 cash dividend is declared
Common receives ?
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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
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Preferred dividend = 5,000 x $15 x 5% = $3,750Preferred dividend = 5,000 x $15 x 5% = $3,750
Year Preferred
Common
2010 $2,000 0
2011 Preferred dividend
$3,750
Remainder $11,250
2012 Preferred dividend
$3,750
Remainder $16,250
a) noncumulative
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Preferred dividend = 5,000 x $15 x 5% = $3,750Preferred dividend = 5,000 x $15 x 5% = $3,750
Year Preferred
Common
2010 $2,000 0
2011 In arrears $1,750
Current year $3,750
$5,500
Remainder $9,500
2012 Current year $3,750
Remainder $16,250
b) cumulative
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
2011
12 22
Retained earnings 15,000
Dividends payable – C/S
9,500
Dividends payable – P/S 5,5002012
1 14
Dividends payable – C/S 9,500
Dividends payable – P/S 5,500
Cash 15,000Copyright (c) 2009 Prentice Hall. All
rights reserved
Use different stock values in decision making
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Book value of preferred stock:
Liquidation price or Preferred stock account A
Dividends in arrears on any outstanding preferred shares B
Total book value attributed to preferred stock A+B
Number of outstanding preferred shares C
Book value per share of preferred stock (A+B)/C
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Book value of common stock:
Total stockholders’ equity D
Less: book value attributed to preferred A+B
Total book value attributed to common stock D-(A+B)
Number of outstanding common shares E
Book value per share of common stock D-(A+B)/E
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Evaluate return on assets and return on stockholders’ equity
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Net income + Interest expense
Net income + Interest expense
Average total assetsAverage total assets
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Net income – preferred dividends
Net income – preferred dividends
Average common stockholders’ equity
Average common stockholders’ equity
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Account for the income tax of a corporation
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Income tax expense
Income before taxes
from the income
statement
Income tax rate
Income tax payable
Taxable income from
the tax return
Income tax rate
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Income statement
Tax return
Accounting rules and tax rules can differ
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