ACCOUNTING FOR CORPORATIONS

II
PAID-IN (ISSUED) CAPITAL
FUNDAMENTAL SHARE RIGHTS
 Corporations raise equity funds by selling shares of the
corporation.

 Shareholders are the owners of a corporation.

 The number of shares possessed determines each owner’s

interest.

 Each share of stock has certain rights.

FUNDAMENTAL SHARE RIGHTS

 Each share carries the following rights:

1. To share proportionately in profits and losses.
2. To share proportionately in management (the right to vote
for directors).
3. To share proportionately in assets upon liquidation.
4. To share proportionately in any new issues of stock of the
same class—called the preemptive right.
 VARIETY OF OWNERSHIP INTERESTS
 Common stock represents basic ownership interest.
Bears ultimate risks of loss.
Receives the benefits of success.
Not guaranteed dividends nor assets upon dissolution.
VARIETY OF OWNERSHIP INTERESTS
 Corporation may offer two or more classes of stock, each with
different rights to broaden investor appeal.

 Preferred stock is created by contract, when stockholders’

sacrifice certain rights of common stock ownership in return for
other rights or privileges.

 In return for this preference, the preferred stockholders may

sacrifice their right to a voice in management or their right to
share in profits beyond the stated rate.
VARIETY OF OWNERSHIP INTERESTS
 The special right of preferred stockholders usually include one
or both of the following:

Preference to a specified amount of dividends. If the board

of directors declares dividends, preferred stockholders will
receive the designated dividend before any dividends are
paid to common stockholders.

Preferred stockholders have a preference as to the

distribution of assets in the event the corporation is
dissolved.
 VARIETY OF OWNERSHIP INTERESTS
 Preferred stocks may be cumulative or noncumulative.

 Preferred stocks are cumulative, which means that if the specified

dividend is not paid for a given year, the unpaid dividends (called
dividends in arrears ) accumulate and must be made up in a later
dividend year before any dividends are paid on common stocks.

 Preferred stocks may be participating or nonparticipating .

 A participating feature allows preferred stockholders to receive

additional dividends beyond the stated amount.
 ILLUSTRATIVE EXAMPLE
 The shareholders’ equity of Corbin Enterprises includes the items shown
below. The board of directors declared cash dividends of $360,000,
$500,000, and $700,000 in its first three years of operation—2015, 2016,
and 2017, respectively.

Common stock $3,000,000

Paid-in capital—excess of par, common* 9,800,000
Preferred stock, 8% 6,000,000
Paid-in capital—excess of par, preferred 780,000

 Determine the amount of dividends to be paid to preferred and common

shareholders in each of the three years, assuming that the preferred stock
is cumulative and nonparticipating.

* Paid in capital in excess of par is essentially the difference between the fair market

value paid for the stock and the stock's par value. Par value indicates the real value of shares. All
shares were issued at that price.
SOLUTION
Preferred Common
2015 $360,000* $0
2016 500,000** 0
2017 580,000*** 120,000
(remainder)

 The preferred shareholders are entitled to dividends of $480,000 (8% *

$6,000,000), but only $360,000 dividends are declared in 2015 so dividends in
arrears are $120,000.

 ** $120,000 dividends in arrears plus $380,000 of the $480,000 current preference.

 *** $100,000 dividends in arrears ($480,000 - 380,000) plus the $480,000 current
preference.
ACCOUNTING FOR THE ISSUANCE OF
SHARES
SHARES ISSUED FOR CASH
 Dow Industrial sells 100,000 of its common shares, $1 par per
share, for $10 per share:

Journal entry:
Cash 1000,000
Common stock (100,000 * $1) 100,000
Paid-in capital—excess of par (remainder) 900,000

 When shares have a designated par value, that amount denotes stated
capital and is credited to the stock account. Proceeds in excess of this
amount are credited to paid-in capital—excess of par (also called
additional paid-in capital).
SHARES ISSUED FOR CASH
 No-Par Stock: The issuance of capital stock without par-value
 If the shares are no-par, the entry is as follows:

Journal entry:
Cash (100,000*$10) 1000,000
Common stock (100,000 * $10) 1000,000

 The entire proceeds from the sale of no-par stock are deemed
stated capital and recorded in the stock account.
SHARES ISSUED FOR NON-CASH CONSIDERATION

 Occasionally, a company might issue its shares for

consideration other than cash.

 It is not uncommon for a new company, yet to establish a

reliable cash flow, to pay for promotional and legal services
with shares rather than with cash.

 Similarly, shares might be given in payment for land, or for

equipment, or for some other noncash asset.
SHARES ISSUED FOR NON-CASH
CONSIDERATION
 Even without a receipt of cash to establish the fair value of the
shares at the time of the exchange, the transaction still should
be recorded at fair value. Best evidence of fair value might be:

A quoted market price for the shares.

A selling price established in a recent issue of shares for
cash.
The amount of cash that would have been paid in a cash
purchase of the asset or service.
An independent appraisal of the value of the asset received.
Other available evidence.
SHARES ISSUED FOR NON-CASH CONSIDERATION

 DuMont Chemicals issues 1 million of its common shares, $1

par per share, in exchange for a custom-built factory for which
no cash price is available. Today’s issue of The Wall Street
Journal lists DuMont’s stock at $10 per share:

Journal entry:
Property, plant, and equipment $10,000,000
Common stock (1000,000 * $1) 1000,000
Paid-in capital—excess of par 9000,000
MORE THAN ONE SECURITY ISSUED FOR A
SINGLE PRICE

 A company might sell more than one security—perhaps

common shares and preferred shares—for a single price.

 The cash received usually is the sum of the separate market

values of the two securities. Of course, each is then recorded at
its market value.

 However, if only one security’s value is known, the second

security’s market value is inferred from the total selling price.
MORE THAN ONE SECURITY ISSUED FOR A SINGLE PRICE

 AP&P issues 4 million of its common shares, $1 par per share,

and 4 million of its preferred shares, $10 par, for $100 million.
Today’s issue of The Wall Street Journal lists AP&P’s common
at $10 per share. There is no established market for the
preferred shares:

Journal entry:
Cash $100,000,000
Common stock (4000,000 * $1) 4000,000
Paid-in capital—excess of par, common 36,000,000
Preferred stock (4000,000 * $10) 40,000,000
Paid-in capital—excess of par, preferred 20,000,000
SHARE ISSUE COSTS

 When a company sells shares, it obtains the legal, promotional,

and accounting services necessary to effect the sale. The cost of
these services reduces the net proceeds from selling the shares.

 Since paid-in capital—excess of par is credited for the excess

of the proceeds over the par value of the shares sold, the effect
of share issue costs is to reduce the amount credited to that
account.
SHARE ISSUE COSTS
 The Internet search site Local.com noted in its financial
statements: “. . . we completed an underwritten public offering of
4,600,000 shares of our common stock at $4.25 per share (the
“Offering”), resulting in net proceeds to us of $18.2 million after
deducting underwriting discounts and commissions and other
related expenses.” Local.com’s entry to record the sale was
($.00001 par per share):

Journal entry:
Cash $18,200,000
Common stock (4,600,000 * $.00001) 100,000
Paid-in capital—excess of par 18,100,000
 EXERCISE
 The shareholders’ equity section of the balance sheet of National Foods, Inc., included
the following accounts at December 31, 2014:

Required:
During 2015, several transactions affected the stock of National Foods. Prepare the
appropriate entries for these events:

 On March 11, National Foods issued 10 million of its 9.2% preferred shares, $1 par per
share, for $44 per share.

Journal entry:
Cash $440,000,000
Preferred stock (10,000,000 * $1) 10,000,000
Paid-in capital—excess of par, preferred 430,000,000
 EXERCISE
 The shareholders’ equity section of the balance sheet of National Foods, Inc., included
the following accounts at December 31, 2014:

Required:
 On November 22, 1 million common shares, $1 par per share, were issued in exchange
for eight labeling machines. Each machine was built to custom specifications so no cash
price was available. National Food’s stock was listed at $10 per share.

Journal entry:
Machinery $10,000,000
Common stock (1000,000 * $1) 1000,000
Paid-in capital—excess of par, common (1 m. *$9) 9,000,000
 EXERCISE
 The shareholders’ equity section of the balance sheet of National Foods, Inc., included
the following accounts at December 31, 2014:

Required:
 On November 23, 1 million of the common shares and 1 million preferred shares were
sold for $60 million. The preferred shares had not traded since March and their market
value was uncertain.
Journal entry:
Cash $60,000,000
Common stock (1000,000 * $1) 1000,000
Paid-in capital—excess of par, common 9,000,000
Preferred stock (1000,000 * $1)
1000,000
Paid-in capital—excess of par, preferred (balance) 49,000,000
 EXERCISE
 The shareholders’ equity section of the balance sheet of National
Foods, Inc., included the following accounts at December 31, 2014:

Required:
 Prepare the shareholders’ equity section of the comparative balance
sheets for National Foods at December 31, 2015 and 2014. Assume that
net income for 2015 was $400 million and the only other transaction
affecting shareholders’ equity was the payment of the 9.2% dividend on
the 11 million preferred shares ($1 million).
EXERCISE