Chapter 12

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 1
Review the characteristics of a corporation

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 ADVANTAGES
1.Corporations can raise
more money
2.Corporations have
continuous life
3.Ownership transfer is easy
4.No mutual agency
5.Stockholders have limited
liability
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DISADVANTAGES
1.Ownership and
management separated.
2.Double taxation
3.Government regulation is
expensive
4.Start-up costs are higher
Authorization–State’s permission to operate
Authorized stock–How many shares of a class
of stock a corporation may issue
Capital stock–Represents ownership of the
corporation's capital
Stock certificate–Paper evidencing ownership
in a corporation
Company name
Stockholder name
Number of shares owned
Outstanding stock–Stock held by stockholders
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 2
Describe the two sources of stockholders’
equity and the classes of stock

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Paid-in capital
(Contributed capital)
Amounts received from
stockholders
Common stock is main
source
Externally generated
Resulting from
transactions with outsiders
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Retained earnings
Earned by profitable
operations
Internally generated
Results from internal
corporate decisions to
retain net income for use
in the company
Common stock Preferred stock
Four basic rights Certain advantages over
Vote—voting on common stock
corporate matters Receive dividends
Dividends—receive a before common
proportionate part of Fixed dividend amount
dividend declared Upon liquidation,
Liquidation—receive a receive assets before
proportionate part of common
assets remaining Also have basic rights of
Preemption—maintain common stockholders
their proportionate unless withheld
ownership
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Par value No-par
Arbitrary amount assigned No arbitrary amount
to a share of stock assigned
Set when the corporate Could have a stated value
charter is filed Stated value treated as par
Usually set low as to
avoid legal difficulties

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 3
Journalize the issuance of stock and prepare
the stockholders’ equity section of a
corporation balance sheet

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Sell directly to stockholders
Use an underwriter/brokerage firm
Buys unsold stock
Issue price–price received for issuing stock
Usually exceeds par value
Stock exchange– here public company stock is
traded
PSE–Pakistan Stock Exchange

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Issuing common stock at par

Issuing common stock above par

Amount received above par is called a premium
Not a gain; called additional paid-in capital
Another account is created for the premium amount

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 SMART TOUCH LEARNING, INC.
Stockholders’ Equity
January 2, 2013
Paid in Capital :
Common stock, $ 1 par, 20,000,000 shares authorized
Total Paid-in capital is the sum of Common stock
2,000,000 shares issued 2,000,000
plus Paid-in capital in excess of par
Paid in Capital in excess of Par –Common 19,000,000
Total Paid in Capital $ 21,000,000
Retained Earnings 0
Total Stockholder’ Equity $ 21,000,000
The balance of the Common stock account is calculated

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No-par stock
No Paid-in capital in excess of par account needed
Full amount received is credited to Common stock

Balance sheet shows only the Common stock

account

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Stated value stock
Similar to accounting for par value stock
Amount above stated value is credited to Paid-in
capital in excess of stated value
Issuing stock for assets other than cash
Asset is debited for its fair value

Building is debited instead of cash

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Issuing preferred stock
Similar to issuing common stock, except Preferred
stock is credited at par value

Preferred stock usually is not issued above par

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Equity accounts are listed in the following order on the
balance sheet: Preferred stock , Common stock,
Retained earnings
Paid in Capital :
Preferred Stock, 6%, $ 50 par, 2000 shares authorized,
2,000 shares issued $ 100,000
Paid in capital in excess of Par-Preferred 5,000
Common stock, $ 1 par, 20,000,000 shares authorized
2,000,000 shares issued 2,000,000
Paid in Capital in excess of Par –Common 19,000,000
Total Paid in Capital $ 21,105,000
Retained Earnings 0
Total Stockholder’ Equity $ 21,105,000
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 Thank you

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