Chapter 11 Powerpoint Flashcards
Classified by Purpose
Not-for-Profit
For Profit
Classified by Ownership
Publicly held
Privately held
Advantages of a Corporation
Seperate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Disadvantages of a Corporation
Corporate Management
Government Regulations
Additional Taxes
Seperate Legal Existence
Corporation acts under its own name rather than in the name of its stockholders
Limited Liability of Stockholders
Limited to their investment
Transferable Ownership Rights
Shareholders may sell their stock
Ability to Acquire Capital
Corporation can obtain capital through the issuance of stock
Continuous Life
Continuance as a going convern is not affected by the withdrawl, death, or incapacity of a stockholder, employee, or officier
Disadvnatage: Corporate Management
Seperation of ownership and management prevents owners from having an activite role in managing the company
Government Regulations
State laws
SEC laws
Stock exchange requirements
Federal regulations
Additional Taxes
Corporations pay income taxes as:
- a sperate legal entity
Stockholders pay taxes on cash dividends
Stockholders Rights
- Vote in election of board of directors and on actions that require stockholder approval
- Share the corporate earnings through receipt of dividends
- Keep the same percentage of ownership when new shares of stock are issued (preemptive right)
- Share in assets upon liquidation in proportion to their holdings (residual claim)
Authorized Stock
Charter indicates the amount of stock that a corporation is authorized to sell
Number of authorized shares is often reported in the stockholders’ equity section
How can a corporation issue common stock?
Directly to investors
Indirectly thorugh an investment banking firm
U.S. securities exchanges
New York Stock Exchange
American Stock Exchange
13 regional exchanges
NASDAQ national market
Years ago, par value determined the legal capital per share that a company must _________________________
retain in the business for the protection of corporate creditors
Today many states ______________ a par value
do not require
_______________ is quite common today
No-par value stock
In many states the board of directors assigns a _________________
stated value to no-par shares
Par value stocks
Capital stock that has been assigned a value per share
Two Primary Sources of Equity
Paid-in Capital
Retained Earnings
Paid-in capital
The total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock
Retained Earnings
Net income that a corporation retains for future use
Primary objectives of accounting for Common Stock
- Identify the specific sources of paid-in capital
- Maintain the distinction between paid-in capital and retained earnings
Other than consideration received, the issuance of common stock affects only __________________
paid-in capital accounts
Journal entry for issuing stock of $1,000
Dr. Cash 1,000
Cr. Common Stock 1,000
Journal entry: issue 1,000 shares of $1 par value stock for cash at $5 per share
Dr. Cash 5,000
Cr. Common Stock 1,000
Cr. Paid-in capital in excess of par value 4,000
Treasury stock
Corporation’s own stock that it has reacquired from shareholders, but not retired
Reasons corporations purchase their outstanding stock:
- To reissue shares to officers and employees under bonus and stock compensation plans
- To increase trading of the company’s stock in the securities market
- To have additional shares available for use in acquiring other companies
- To increase earnings per share
*to eliminate hostile shareholders sometimes
Purchase of Treasury Stock
Generally accounted for by the cost method
Debit Treasury Stock for the price paid
Treasury stock is a contra stockholders’ equity account, not an asset
Purchase of treasury stock reduces stockholders’ equity
Journal entry: X company acquires 4,000 shares of its stock at $8 per share
Dr. Treasury stock 32,000
Cr. Cash 32,000
Features often associated with preferred stock
Preference as to dividends
Preference as to assets in liquidation
Nonvoting
Paid in capital account with preffered stock
Paid-in Capital in Excess of Par Value–Preferred Stock
Paid in capital account with common stock
Paid-in Capital in Excess of Par Value–Common Stock
Preferred Stock Dividend Preferences
Rights to receive dividends before common stockholders
Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount
Cumulative dividend
Cumulative dividend
Holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends
Preferred Stock Liquidation Preference
Preference on corporate assets if the corporation fails
Preferences may be: for the par value of the shares or for a specified liquidating value
Dividends distribution to stockholders
Distribution to stockholders on a pro rata (proportional to ownership) basis
Types of Dividends
- Cash dividends
- Property dividends
- Stock dividends
- Scrip (promissory note)
How are Dividends expressed?
- As a percentage of the par or stated value
- AS a dollar amount per share
For a corporation to pay a cash dividend, it must have:
- Retained earnings - payments of cash dividends from retained earnings is legal in all states
- Adequate cash
- Declaration by the Board of Directors
Journal entry: declaration date of dividend
Dr. Cash dividends XXX
Cr. Dividends payable XXX
Journal entry on payment date of dividend
Dr. Dividends payable XXX
Cr. Cash XXX
Entries for cash dividends are required on the:
Declaration date and the payment date
What does the distribution of stock dividends result in?
Results in decrease in retained earnings
Increase in paid-in capital
Reasons corporations issue stock dividends
- Satisfy stockholders’ dividend expectations without spending cash
- Increase the marketability of the corporation’s stock
- Emphasize that a portion of stockholders’ equity has been permanently reinvested in the business
Retained earnings
Net income that a company retains for use in the business
Net income __________ Retained Earnings
increases
Net loss _________ Retained Earnings
decreases
Retained earnings is part of the ___________________ on the total assets of the corporation
stockholders’ claim
A debit balance in Retained Earnings is identified as a _____________
deficit
Retained Earnigns Restrictions
- Legal restrictions
- Contractual restrictions
- Voluntary restrictions
Two classifications of paid-in capital
- Capital stock
- Additional paid-in capital
Payout ratio
Cash Dividends Declared on Common Stock
Net Income
*Measures the percentage of earnigns a company distributes in the form of cash dividends
Return on Common Stockholders’ Equity Ratio =
Net income - Preferred Stock Dividends
Average Common Stockholders’ Equity
*shows how many dollars of net income a company earned for each dollar of common stockholders’ equity
Advantages of Bond financing
- Stockholder control is not affected - bondholders do not have voting rights so current owners (stockholders) retain full control of the company
- Tax savings result - Bond interest is deductible for tax purposes; dividends on stocks are not
- Return on common stockholders’ equity may be higher - although bond interest expense reduces net income, no additonal shares of common stock are issued
Why Corporations Invest
- Corporation may have excess cash
- To generate earnings from investment income
- For strateigc reasons
Recording Acquisiton of Bonds
Costs includes all expenditures necessary to acquire investments, such as price paid plus brokerage fees
Journal entry: X company acquires bonds for $54,000
Dr. Debt Investments 54,000
Cr. Cash 54,000
Journal entry for receipt of interest without previous accrual
Dr. Cash XXX
Cr. Interest Revenue XXX
Journal entry accruing interest
Dr. Interest Receivable XXX
Cr. Interest Revenue XXX
Jouranl entry for receipt of interest after it has been accrued
Dr. Cash XXX
Cr. Interest Receivable XXX
Net proceeds
Sales price less brokerage fees
Gain on sale of a bond account
Gain on Sale of Investments
The accounting depends on the extent of the ______________ over the operating and financial affairs of the issuing corporation
investor’s influence
0-20% method
Cost method
No significant influence usually exists
20-50% method
Equity method
Significant influence usually exists
50-100%
Investment Valued on Parent’s Books using Cost method or Equity Method
(Investment eliminated in Consolidation)
Journal entry for acquiring stock (<20%)
Dr. Stock Investments XXX
Cr. Cash XXX
Journal entry for receiving cash dividends (<20%)
Dr. Cash XXX
Cr. Dividend Revenue XXX
Adjust each period for (equity method)
The investor’s proportionate share of the earnings (losses)
The dividends received by the investor
Journal entry: X corporation acquires common stock for 120,000 dollars
Dr. Stock Investments XXX
Cr. Cash XXX
Controlling Interest
When one corporation acquires a voting interest of more than 50 percent in another corporation
Investor = parent
Investee = subsidiary
Investment in the subsidiary is reported on the parent’s books as a long-term investment
Parent generally prepares consolidated financial statements
3 Categories of Securities
Trading Securities
Available-for-Sale Securities
Held-to-Maturity Securities
Trading Securities
Companies hold trading securities with the intention of selling them in a short period
Trading means frequent buying and selling
Companies report trading securities at fair value, and report changes from cost as part of net income
Available-for-Sale Securities
Companies hold securities with the intent of selling these investments sometime in the future
Can be current assets or long-term assets depending on intent of the management
Reported at fair value, and report changes from cost as a component of the stockholders’ equity section
Journal entry for adjusting entry of a trading security
Dr. Market Adjustment–Trading XXX
Cr. Unrealized Gain–Income XXX
An unrealized loss on equity is reported where?
Deducted from the stockholders’ equity section
Other Revenue and Gains
Interest Revenue
Dividend Revenue
Gain on Sale of Investments
Unrealized Gain-Income
Other Expenses and Losses
Loss on Sale of Investments
Unrealized Loss–Income
Show a balance sheet presentation of trading securities fair value of 48,000
Balance Sheet
Current Assets
Short-term investments, at fair value 48,000
