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

NAME:

College Accounting

Chapter 13—Corporations: Paid-In Capital and the Balance Sheet

Structured Notes

Corporations dominate business activity in the United States. ______and ______are more numerous, but ______do more business and are larger.

OBJECTIVE #1: Identify the characteristics of a corporation.

Separate Legal Entity

A corporation is a ______

______

A corporation’s owners are called ______or ______

Continuous Life and Transferability of Ownership

The owners’ equity of a corporation is divided into ______.

A corporation has continuous life regardless of ______.

No Mutual Agency

Mutual agency means that ______. Mutual agency operates in ______but NOT in .

Limited Stockholder Liability

Stockholders have ______for corporation debts. That means they have .

The most a stockholder can lose on an investment in a corporation is the______

______. In contrast, proprietors and partners are personally liable for ______

______, unless the partnership is a ______

Separation of Ownership and Management

A board of directors—elected by ______--appoints the officers to manage the business.

Corporate Taxation

Corporations are separate ______. Corporations are subject to double taxation:

* ______

* ______

Proprietorships and partnerships pay no business ______. Instead the tax falls solely on ______.

Government Regulation

Because of stockholders’ limited ______, outsiders can look no further than the ______for payment of its debts. To protect persons who do business with corporations, ______monitor corporations.

Advantages and Disadvantages of a Corporation

Advantages

ORGANIZING A CORPORATION

Organizing a corporation begins when ______

______.

The charter authorizes the corporation to issue a ______

The incorporators pay ______, sign the ______, and file ______; then the corporation becomes a .

The stockholders agree to a set of ______, which act as their constitution.

Ultimate control of the corporation rests with the stockholders as they vote their ______

______Each share of stock carries ______vote.

The stockholders elect the board of directors, which

______

______

______

CAPITAL STOCK

A corporation issues ______to the stockholders when they buy the stock.

The stock represents the corporation’s ______, so it is called ______.

The basic unit of stock is a ______

The certificate shows the:

* ______

* ______

* ______

Stock that is held by the stockholders is said to be ______.

STOCKHOLDERS’ EQUITY BASICS

A corporation reports assets and liabilities exactly as for a ______or a ______.

But the owners’ equity of a corporation –called ______is reported differently. State laws require corporations to report their sources of capital because

______

Two basic sources:

Paid-in capital (also called contributed capital) represents amounts ______

______

Common Stock is the main ______

Retained earnings is ______.

Paid-in Capital Comes from the Stockholders

To record the receipt of cash and the issuance of stock:

______is debited

______is credited

Issuing stock increases both ______and ______.

Retained Earnings Come from ______

Profitable operations generate ______, which increases ______

Through a separate account called ______.

A corporation needs at least two capital accounts:

* ______

* ______

To close Revenue account:

______is debited

______is credited

To close Expenses,

______is debited

______is credited

Income Summary’s balance is closed to ______.

A Retained Earnings Deficit

A loss may cause a ______balance in Retained Earnings and is reported as a negative amount in ______.

A Corporation May Pay Dividends to the Stockholders

A profitable corporation may distributed ______to the stockholders. Such distributions are called ______.

Dividends are similar to a proprietor’s ______.

Dividends decrease both ______and ______.

Most states prohibit using ______for dividends.

______is the term accountants use to refer to the portion of stockholders’ equity that cannot be used for dividends.

A stockholder has four basic rights, unless a right is withheld by contract.

1. ______. Each share of stock carries ______vote.

1. ______. Each share of stock receives ______.

1. ______.

1. ______(usually withheld because it is rarely exercised

Classes of Stock

Corporations can issue different classes of stock. The stock of a corporation may be either:

______

______

Common Stock and Preferred Stock

Every corporation issues ______, which represents the basic ownership of the corporation. The owners are the ______.

Some companies issues Class A common stock, which carries the right to ______. They may also issue Class B common stock, which may be ______.

There is a separate account for each______.

Preferred stock gives its owners ______.

Most notably, preferred stockholders receive dividends before ______, and preferred receives assets before common if .

Corporations pay a fixed dividend on ______. Investors usually buy ______to earn those fixed dividends.

Owners of preferred stock also have the four basic stockholder rights, unless a right is withheld. The right to ______is sometimes withheld.

Par Value, Stated Value, and No-Par Stock

Stock may carry a ______or it may be ______stock

Par value is an ______

Most companies set par value low to avoid ______

______.

Companies maintain a minimum amount of stockholders’ equity for the ______

Of creditors, and this minimum represents the corporation’s legal ______.

Legal capital is usually the ______

Par value is used to compute ______.

No-par stock does not have ______.

Some no-par stock has a ______, which makes it similar to ______

______. The stated value is an arbitrary amount similar to ______.

ISSUING STOCK

OBJECTIVE #2: Record the issuance of stock

A company can sell its stock directly to stockholders or it can use the services of an ______.

The price that the corporation receives from issuing stock is called the ______. Usually the issue price ______par value because par value is quite low.

Issuing Common Stock

The ads for advertising stock are called ______.

Issuing Common Stock at Par

______is debited

______is credited to issue common stock at par

Issuing Common Stock at a Premium

Most corporations set par value low and issue common stock for a price ______.

The amount above par is called a ______

A premium on the sale of stock is NOT a ______, ______, or

______for the corporation because ______.

A company can have not profit or loss when ______.

To issue common stock at a premium,

______is debited

______is credited

______is credited

COMMON STOCK BALANCE = ______X ______

Paid in Capital in Excess of Par = ______x ______

Total paid-in capital = ______+ ______

ISSUING NO-PAR STOCK

When a company issues no-par stock, it debits the ______and credits the

______.

ISSUING NO PAR STOCK WITH A STATED VALUE

Accounting for no-par stock with a stated value is identical to accounting for ______

Stock. No-par stock with a stated value uses an account titled______

______.

ISSUING STOCK FOR ASSETS OTHER THAN CASH

If a corporation issues stock for assets other than cash, (equipment and building),

______is debited

______is debited

______is credited

______is credited

ISSUING PREFERRED STOCK

To issue preferred stock,

______is debited

______is credited

ETHICAL CONSIDERATIONS

A company is supposed to record an asset received at its ______

OBJECTIVE #3: Prepare the stockholders’ equity section of a corporation balance sheet.

The order of equity accounts:

______

______

______

______

ACCOUNTING FOR CASH DIVIDENDS

Corporations declare dividends from ______

DIVIDEND DATES

A corporation declares a dividend before paying it. Three dividend dates are relevant:

1. Declaration Date. On the declaration date, the board of directors______

______

The declaration of a cash dividend creates a ______

1. Date of record. Those stockholders holding the stock on the date of records, will receive ______

______

1. Payment date. Payment of the dividend usually follows the ______

Objective #4: Account for cash dividends

DECLARING AND PAYING DIVIDENDS

The cash dividend rate on preferred stock is often expressed as a ______

______

But sometimes cash dividends on preferred stock are expressed as a ______.

Preferred dividends are computed two ways, depending on______

______

Two ways to compute preferred dividends:

1. ______x ______= ______

1. ______x ______= ______

Cash dividends on common stock are computed the second way because ______

______

The declaration of a cash dividend,

Debit ______

Credit ______

To pay the dividend,

Debit ______

Credit ______

Dividends Payable is a ______

When a company has issued both preferred and common, the ______

get their dividends first. The common stockholders receive dividends only if ______

______

DIVIDING DIVIDENDS BETWEEN PREFERRED AND COMMON

If a company’s dividends is large enough to cover the preferred dividend, the preferred stockholders get their , and the common stockholders get . But if the year’s dividend falls below the annual preferred amount, the preferred stockholders receive

______

and the common stockholders get ______

DIVIDENDS ON CUMULATIVE AND NONCUMULATIVE PREFERRED

Preferred stock can be either:

______or ______

Preferred is ______unless it’s specifically designated as noncumulative. Most preferred stock is ______.

A corporation may fail to pay the preferred dividend. This is called ______

______, and the dividends are said to be ______.

Cumulative preferred must receive ______

______

If the preferred stock is noncumulative, the corporation need not ______

______

Dividends in arrears are not a ______.

Objective #5: Use different stock values in decision making

Market Value

Market value, or market price, is ______

______

In almost all cases, stockholders are more concerned about ______

______

Book Value

Book value is the ______

______

If the company has only common stock outstanding, you can divide ______

______

If the company has both preferred and common outstanding, ______

has first claims to the equity. Therefore, ______

is subtracted from ______

to compute book value per share of common.

EVALUATING OPERATIONS

To compare companies, we need some ______.

Two important ratios are______

and ______.

Objective #6: Rate of Return on Total Assets

The rate of return on total assets, measures a ______

______

Two groups invest money to finance a corporation:

______and ______

Net Income and interest expense are taken from the ______.

Average total assets comes from the ______.

In most industries a ______return on assets is considered good.

RATE OF RETURN ON COMMON STOCKHOLDERS’ EQUITY

Rate of return on common stockholders’ equity shows the relationship between ______

______and their average common equity.

Most companies strive for return on equity of ______% or higher.

If return on assets ever exceeds return on ______, the company is in trouble. Because the company’s interest expense is ______than its return on equity.

Return on assets should always be significantly lower than ______.

ACCOUNTING FOR INCOME TAXES BY CORPORATIONS

Objective #7: Account for the income tax of a corporation

To account for income tax, a corporation measures two income tax amounts:

______

______

The income statement and the ______are entirely separate documents. The tax return is new. It reports .

For most companies, income tax expense and income tax payable ______. The most important difference occurs when

______