ACCT 4A(13.1-13.3)

Look At The Balance Sheet

Preferred Stock is included in the stockholders' equity section of the balance sheet and is often listed first. Any Paid-In Capital in Excess of Par—Preferred is listed next, followed by Common Stock and Paid-In Capital in Excess of Par—Common.

Issuing Common Stock At Par Value

When you account issuing stocks, the dollar amount that you are recording is the par value. It was stated that the par value of the 15,000 stocks was $1.

Paid-In Capital

(also called contributed capital) represents amounts received from the stockholders in exchange for stock. Common stock is the main source of paid-in capital. Paid-in capital is externally generated capital and results from transactions with outsiders.

What A Stock Certificate Has

- Company name - Stockholder name - Number of shares owned by the stockholder

Stockholder's Rights

1. Vote. Stockholders participate in management indirectly by voting on corporate matters at stockholders' meetings (or sometimes through the mail or electronic voting). This is the only way in which a stockholder can help to manage the corporation. Normally, each share of basic ownership in the corporation carries one vote. 2. Dividends. Stockholders receive a proportionate part of any dividend that is declared and paid. A dividend is a distribution of a corporation's earnings to stockholders. Each share of stock receives an equal dividend so, for example, a shareholder who owns 1% of the total shares in the company receives 1% of any total dividend. 3. Liquidation. Stockholders receive their proportionate share of any assets remaining after the corporation pays its debts and liquidates (goes out of business). 4. Preemptive right. Stockholders have a preemptive right to maintain their proportionate ownership in the corporation. For example, suppose a stockholder owns 5% of a corporation's stock. If the corporation issues 100,000 new shares of stock, it must offer the stockholder the opportunity to buy 5% (5,000) of the new shares. This right, however, is usually withheld by contract for most corporations.

Issuing Stated Value Common Stock

Accounting for stated value common stock is almost identical to accounting for par value stock. The only difference is that stated value stock uses an account titled "Paid-In Capital in Excess of Stated" to record amounts received above the stated value. For example, assume that instead of issuing 3,000 shares of $1 par value stock for $5 per share, Smart Touch Learning issues 3,000 shares of $1 stated value stock for $5 per share. Smart Touch Learning would record the following journal entry:(image)

Notice The Reporting In The Balance Sheet

Analyze Image

Stockholder's Equity In The Balance Sheet

Analyze the image

Issuing Preferred Stock

Assume that Smart Touch Learning has authorization from the state to issue 2,000 shares of preferred stock. Smart Touch Learning decides to issue 1,000 shares of its $50 par, 6% preferred stock on January 3, 2019, at $55 per share. (The 6% in the description of the preferred stock refers to the stated dividend associated with the stock and is explained later in the chapter.) The issuance entry would be as follows:

No-Par Stock

This does not have par value. No-par value stock has an advantage because there is no confusion between the par value and market value of the stock.

Par-Value

This is an amount assigned by a company to a share of its stock. Most companies set par value low to avoid issuing their stock below par. The par value of a stock has no relation to the market value, which is the price at which the stock is bought and sold.

Retained Earnings

This is equity earned by profitable operations that is not distributed to stockholders. Retained earnings is internally generated equity because it results from corporate decisions to retain net income to use in future operations or for expansion.

Corporation

This is is a business organized under state law that is a separate legal entity. Corporations dominate business activity in the United States.

Stated Value Stock

This is no-par stock that has been assigned an amount similar to par value. Stated value represents the minimum amount that the corporation can issue the stock for. Usually the state the company incorporates in will determine whether a stock may be par or stated value stock.

Outstanding Stock

This is stock that is held by the stockholders. The outstanding stock of a corporation represents 100% of its ownership. The numbers of shares of authorized stock, issued stock, and outstanding stock are most likely going to be different amounts.[look at image]

Preferred Stock

This kind of stock gives its owners certain advantages over common stock. Most notably, preferred stockholders receive a dividend preference over common stockholders. - Investors usually buy preferred stock to earn those fixed dividends. With these advantages, preferred stockholders take less investment risk than common stockholders. - Owners of preferred stock also have the four basic stockholder rights, unless a right is withheld. The right to vote, for example, is usually withheld from preferred stock.

Common Stock

This represents the basic ownership of the corporation. - Some companies issue Class A common stock, which carries the right to vote. They may also issue Class B common stock, which may be nonvoting.

Issued Stock

This stock has been issued by the corporation but may or may not be held by stockholders. A corporation issues stock certificates to the stockholders when they buy the stock. The stock certificate represents the individual's ownership of the corporation's capital, so it is called capital stock.

Issuing No-Par Common Stock

When a company issues no-par stock, it debits the asset received and credits the stock account. For no-par stock, there can be no Paid-In Capital in Excess of Par because there is no par to be in excess of. - Assume that, instead of $1 par value, Smart Touch Learning's common stock is no-par. How would that change the recording of the issuance of 15,000 shares for $1 and 3,000 shares for $5? The stock-issuance entries would be as follows:(image) We CREDIT "Common Stock-No Par Value"

Issuing Common Stock At A Premium

The amount above par value is called a premium. - Assume Smart Touch Learning issues an additional 3,000 shares for $5 per share. The $4 difference between the issue price ($5) and par value ($1) is a premium. - A premium on the issue of stock is not a gain, income, or profit for the corporation because the company is dealing with its own stock. This situation illustrates one of the fundamentals of accounting in that a company cannot report a profit or loss when buying or selling its own stock. The new account we use in this case is s Paid-In Capital in Excess of Par, which has a normal balance of CREDIT Notice how you still record the amount at par value & then make a separate entry which constitutes the difference($4)

Authorized Stock

The corporate charter of a corporation identifies the maximum number of shares of stock the corporation may issue, and the maximum number of stocks issued is called "authorized stock."

Issuing Common Stock for Assets Other Than Cash

Instead of DEBIT "Cash" you simply DEBIT the other asset which is being exchanged for common stock.

Characteristics Of A Corporation

Separate legal entity—A corporation is a separate legal entity. It is organized independently of its owners. Number of owners—Corporations have one or more owners (called stockholders). A public corporation is a corporation whose stock can be purchased on an organized stock exchange, such as the New York Stock Exchange (NYSE) or the NASDAQ Stock Market. Public corporations often have thousands of owners. Some corporations are privately held, which means that the stock cannot be purchased on a stock exchange. These corporations often have only a few stockholders. No personal liability of the owner(s) for business's debts—Stockholders are not personally liable for the debts of the corporation. Lack of mutual agency—Unlike owners of a sole proprietorship and partnership, stockholders of the corporation are not mutual agents of the business. Stockholders cannot bind the business to a contract. Indefinite life—Corporations have an indefinite life. They can exist until the business decides to terminate. Withdrawal or death of an owner does not cause termination of the business. Taxation—Corporations are separate taxable entities. The corporation pays the income tax on the business earnings and is also responsible for paying payroll taxes on employee salaries and wages. Corporations also experience double taxation. Double taxation occurs when corporations make cash payments (called dividends) to stockholders. These payments are taxed once as earnings of the corporation and then again when the stockholder receives the dividend. The tax is first paid by the corporation on its corporate income tax return, and then the dividends received by the stockholder are reported on the stockholder's personal income tax return. Capital accumulation—Corporations can raise more money than sole proprietorships and partnerships. T