ch11

The primary objectives in accounting for the issuance of common stock are

(1) to identify the specific sources of paid‐in capital and (2) to maintain the distinction between paid‐in capital and retained earnings.

___ stock is capital stock that has not been assigned a value in the corporate charter. ___ stock is fairly common today.

No‐par value

___ is capital stock that has been assigned a value per share in the corporate charter.

Par value stock

___ allows for legal treatment as a corporation but tax treatment as a partnership—that is, no double taxation.

S corporation; One of the primary criteria is that the company cannot have more than 100 shareholders.

CHARACTERISTICS OF A CORPORATION

Separate Legal Existence; Limited Liability of Stockholders; Transferable Ownership Rights; Ability to Acquire Capital; Continuous Life; Corporation Management; Government Regulations; Additional taxes (double taxation—once at the corporate level and again at the individual level.)

Advantages

Separate legal existence Limited liability of stockholders Transferable ownership rights Ability to acquire capital Continuous life Corporation management—professional managers

The total paid‐in capital from these two transactions is $6,000. If Hydro‐Slide, Inc. has retained earnings of $27,000, the stockholders' equity section of the balance sheet is as shown in Illustration 11-5.

Stockholders' equity Paid-in capital Common stock $ 2,000 Paid-in capital in excess of par value 4,000 Total paid-in capital 6,000 Retained earnings 27,000 Total stockholders' equity $33,000

In many states, the board of directors assigns a stated value to the no‐par shares.

T

par has no relationship with market price.

T

A corporation can issue common stock directly to investors. Alternatively, it can issue common stock indirectly through an investment banking firm that specializes in bringing securities to the attention of prospective investors.

T; Direct issue is typical in closely held companies. Indirect issue is customary for a publicly held corporation.

___ is the amount of stock that a corporation is authorized to sell as indicated in its charter.

Authorized stock; If the corporation has sold all of its authorized stock, then it must obtain permission from the state to change its charter before it can issue additional shares.

When a company records the issuance of common stock for cash, it credits the par value of the shares to ___ and records in a separate paid‐in capital account the portion of the proceeds that is above or below par value.

Common Stock Debit cash

The_______ establish the internal rules and procedures for conducting the affairs of the corporation.

by‐laws

The __ is a document that describes the name and purpose of the corporation, the types and number of shares of stock that are authorized to be issued, the names of the individuals that formed the company, and the number of shares that these individuals agreed to purchase.

charter

When a corporation has only one class of stock, it is identified as ______.

common stock

a ___ has most of the rights and privileges of a person.

corporation

Corporations engaged in interstate commerce must also obtain a ___ from each state in which they do business. The ___ subjects the corporation's operating activities to the general corporation laws of the state.

license

the issuance of common stock affects only

paid‐in capital accounts.

a ____, often referred to as a closely held corporation, usually has only a few stockholders and does not offer its stock for sale to the general public.

privately held corporation

A ____ may have thousands of stockholders, and its stock is traded on a national securities market such as the New York Stock Exchange.

publicly held corporation

We can classify corporations in a variety of ways. Two common classifications are by

purpose and by ownership.

Owners' equity is identified by various names:

stockholders' equity, shareholders' equity, or corporate capital.

The stockholders' equity section of a corporation's balance sheet consists of two parts:

(1) paid‐in (contributed) capital and (2) retained earnings (earned capital).

Indicate whether each of the following statements is true or false. If false, indicate how to correct the statement. ______ 1. Similar to partners in a partnership, stockholders of a corporation have unlimited liability. ______ 2. It is relatively easy for a corporation to obtain capital through the issuance of stock. ______ 3. The separation of ownership and management is an advantage of the corporate form of business. ______ 4. The journal entry to record the authorization of capital stock includes a credit to the appropriate capital stock account. ______ 5. All states require a par value per share for capital stock.

1. F! usually limited 2. T 3. F! disadvantage 4. F The authorization of capital stock does not result in a formal accounting entry. 5. False. Many states do not require a par value.

assume Hydro‐Slide, Inc. issues an additional 1,000 shares of the $1 par value common stock for cash at $5 per share. The amount received above the par value, in this case $4($5−$1), would be credited to Paid‐in Capital in Excess of Par Value. The entry is as follows.

Cash 5000 Cr. Common stock (1000x1) 1000 cr. paid in capital in excess of par value 4000

disadvantages

Corporation management—separation of ownership and management Government regulations Additional taxes

net income is recorded in Retained Earnings by a closing entry that debits __ and credits __

Income Summary;Retained Earnings.

the Retained Earnings account is reduced by dividends (both cash dividends and stock dividends) by a closing entry that debits

Retained Earnings and credits Dividends.

___ is net income that a corporation retains in the business.

Retained earnings

The authorization of common stock does not result in a formal accounting entry. Why?

The reason is that the event has no immediate effect on either corporate assets or stockholders' equity. However, the corporation discloses in the stockholders' equity section of the balance sheet the number of shares authorized.

A corporation is formed by grant of a

state charter.

Proof of stock ownership is evidenced by a printed or engraved form known as a ____

stock certificate.

Paid‐in capital is the

total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.