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Paid-In Capital
Chapter 11
PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright 2012 The McGraw-Hill Companies, Inc.
Corporations
An entity created by law.
Ownership can be
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Advantages of Incorporation
Limited personal liability for stockholders Transferability of ownership
Professional management
Continuity of existence
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Disadvantages of Incorporation
Heavy taxation
Greater regulation Cost of formation Separation of ownership and management
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Formation of a Corporation
Each corporation is formed according to the laws of the state where it is located.
The application for corporate status is called the Articles of Incorporation.
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The costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes.
Rights of Stockholders
Voting (in person or by proxy). Rights Proportionate distribution of dividends. Proportionate distribution of assets in a liquidation.
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Stockholders
Rights of Stockholders
Secretary
Treasurer
Controller
Secretary
Treasurer
Controller
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Paid-in Capital
Retained Earnings
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The maximum number of shares of capital stock that can be sold to the public.
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Issued Shares
Unissued Shares
Treasury shares are issued shares that have been reacquired by the corporation.
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Treasury Shares
Stockholders Equity
Par value is an arbitrary amount assigned to each share of stock when it is authorized. Market price is the amount that each share of stock will sell for in the market.
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Stockholders Equity
Common stock can be issued in three forms:
2. The number of shares issued the par value per share in the Common Stock account.
3. The remainder is assigned to Additional Paid-in Capital.
Assume a corporation issues 10,000 shares of its $2 par value stock for $25 per share.
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10,000 $2 = $20,000
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$ 315,000
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500,000 3,000,000
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Preferred Stock
A separate class of stock, typically having priority over common shares in . . . Dividend distributions (rate is usually stated). Distribution of assets in case of liquidation. Other Features Include: Cumulative dividend rights. Usually callable by the company. Normally has no voting rights.
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Vs.
Noncumulative
Undeclared dividends from current and prior years do not have to be paid in future years.
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During 2010, the directors declare cash dividends of $5,000. In 2011, the directors declare cash dividends of $42,000.
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$ $
$ $
29,000 29,000
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Preferred Stock
Stockholders' Equity with Common and Preferred Stock Stockholders' Equity Contributed Capital: Preferred Stock - $100 par value; 1,000 shares authorized; 50 shares issued and outstanding $ Common Stock - $10 par value; 50,000 shares authorized; 30,000 shares issued and outstanding Additional Paid-in Capital Retained Earnings Total Stockholders' Equity $
5,000
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Market Value
Common stock is carried at original issue price. Investments in marketable securities are carried at market value.
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Stock Splits
Companies use stock splits to reduce market price.
Outstanding shares increase, but par value is decreased proportionately.
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Stock Split
Assume a corporation has 5,000 shares of $1 par value common stock outstanding before a 2for1 stock split.
Before Split 5,000 $ $ 1.00 5,000 After Split 10,000 Increase $ $ 0.50 Decrease No 5,000 Change
Common Stock Shares Par Value per Share Total Par Value
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Treasury Stock
No voting or dividend rights
Treasury shares are issued shares that have been reacquired by the corporation.
When stock is reacquired, the corporation records the treasury stock at cost.
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165,000 165,000
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5,000
$ $
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End of Chapter 11
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