Sources of Capital:
Owners’ Equity
Part One: Financial Accounting9
Forms of Business Organizations
Slide 9-1Owned by an individual No incorporation fees No special reports
Profits taxed at proprietor’s personal tax rate
Personally responsible for the entity’s debts
Owned by an individual No incorporation fees No special reports
Profits taxed at proprietor’s personal tax rate
Personally responsible for the entity’s debts
Sole Proprietorship
Forms of Business Organizations
Slide 9-2Owned by two or more persons Each partner is personally liable
for all debts incurred by firm Each partner is responsible for
business actions of other partners
Taxed as individuals
Owned by two or more persons Each partner is personally liable
for all debts incurred by firm Each partner is responsible for
business actions of other partners
Taxed as individuals
Partnership
Forms of Business Organizations
Slide 9-3Legal entity with essentially perpetual existence
Granted a charter to operate Taxed as an entity
Limited liability to owners
Ownership of an individual is easily added or liquidated Legal entity with essentially
perpetual existence
Granted a charter to operate Taxed as an entity
Limited liability to owners
Ownership of an individual is easily added or liquidated
Corporation
There may be significant legal and other fees involved in formation.
The corporation’s activities are limited to those specifically granted in its charter.
It is subject to numerous regulations and requirements.
It must secure permission from each state in which it wishes to operate.
Its income is subject to double taxation.
There may be significant legal and other fees involved in formation.
The corporation’s activities are limited to those specifically granted in its charter.
It is subject to numerous regulations and requirements.
It must secure permission from each state in which it wishes to operate.
Its income is subject to double taxation.
Disadvantages of the Corporation Form
Slide 9-4Salary $60,000$20,000$40,000 Interest on capital 8,0002,4005,600
Remainder 12,000 6,000 6,000 Total $80,000$28,400$51,600
Partnership Equity
Slide 9-5The partnership agreement of Jackson and Curtin provided that Jackson would receive a salary of $20,000 and Curtin a salary of
$40,000; that each would receive 8 percent interest on their
invested capital; and they they would share any remainder equally.
The partnership’s net income for the year is $80,000.
The partnership agreement of Jackson and Curtin provided that Jackson would receive a salary of $20,000 and Curtin a salary of
$40,000; that each would receive 8 percent interest on their
invested capital; and they they would share any remainder equally.
The partnership’s net income for the year is $80,000.
Total Jackson Curtin
Salary $60,000$20,000$40,000 Interest on capital 8,0002,4005,600
Remainder 12,000 6,000 6,000 Total $80,000$28,400$51,600
Partnership Equity
Slide 9-6If the partnership agreement is silent concerning the remainder, then it is
divided equally.
If the partnership agreement is silent concerning the remainder, then it is
divided equally.
Total Jackson Curtin
Recording a Common Stock Issue
Slide 9-7Kuick Corporation is authorized to issue 200,000 shares of $1 par value common stock. Of these,
100,000 shares were issued at $7 per share.
Kuick Corporation is authorized to issue 200,000 shares of $1 par value common stock. Of these,
100,000 shares were issued at $7 per share.
Cash 700,000
Common Stock at Par 100,000
Additional Paid-In Capital 100,000 x $1100,000 x $1 600,000
Cash Dividend
Slide 9-8Kuick Corporation declares a $6,000 dividend on December 15 to be paid on January 15 to holders
of record as of January 1.
Kuick Corporation declares a $6,000 dividend on December 15 to be paid on January 15 to holders
of record as of January 1.
December 15
Retained Earnings 6,000
Dividends Payable 6,000
January 1 (no entry) January 15
Dividends Payable 6,000
Cash 6,000
Stock Dividend
Slide 9-9Kuick Corporation declares and issues a 5 percent stock dividend to the holders of its 100,000
outstanding shares (par value of $1) when the market price of a share is $10.50.
Kuick Corporation declares and issues a 5 percent stock dividend to the holders of its 100,000
outstanding shares (par value of $1) when the market price of a share is $10.50.
Retained Earnings 52,500
Common Stock at Par 5,000
Additional Paid-In Capital 47,500
5,000 x $10.50 5,000 x
$10.50 5,000 x $1 5,000 x
$1
Common stock, $25 per share $ 77.6 $ 77.5
Capital in excess of par 72.0 60.2
Retained earnings 3.409.4 3.033.9
Treasury stock, at cost (1,653.1) (1,105.0) Total stockholders’ equity $1,905.9 $2,075.6
Balance Sheet Presentation
Slide 9-10PRESTON COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet At December 31
(millions)
1998 1997
Basic Earnings Per Share
Slide 9-11Basic earnings per share is a measurement of the corporation’s per share performance
over a period of time.
Basic earnings per share is a measurement of the corporation’s per share performance
over a period of time.
Earnings per share = Net income
Number of shares of common stock outstanding
Earnings per share = $7,000,000
1,000,000 shares = $7
Assume Nugent Corporation had net income of $7 million and 1 million shares of
common stock outstanding.
Assume Nugent Corporation had net income of $7 million and 1 million shares of
common stock outstanding.
= $6.20
Now, assume that Nugent Corporation also has 100,000 shares of $8 convertible
preferred stock.
Now, assume that Nugent Corporation also has 100,000 shares of $8 convertible
preferred stock.
Basic Earnings Per Share
Slide 9-12Earnings per share =Net income - Preferred dividends Number of shares of common
stock outstanding
Earnings per share = $7,000,000 - $800,000 1,000,000 shares
= $5.83
For diluted earnings per share, we assume that the 100,000 convertible preferred shares are exchanged for 200,000 shares of common stock.
For diluted earnings per share, we assume that the 100,000 convertible preferred shares are exchanged for 200,000 shares of common stock.
Earnings Per Share
Slide 9-13Earnings per share =Net income - Preferred dividends Number of shares of common
stock outstanding
Earnings per share = $7,000,000 1,200,000 shares
= $5.83
For diluted earnings per share, we assume that the 100,000 convertible preferred shares are exchanged for 200,000 shares of common stock.
For diluted earnings per share, we assume that the 100,000 convertible preferred shares are exchanged for 200,000 shares of common stock.
Slide 9-14
Earnings per share =Net income - Preferred dividends Number of shares of common
stock outstanding
Earnings per share = $7,000,000 1,200,000 shares
Note that all the preferred stock is assumed converted, so
there would be no dividends.
Note that all the preferred stock is assumed converted, so
there would be no dividends.
1,000,000 shares of common stock plus the 200,000 shares assumed
from converting preferred stock 1,000,000 shares of common stock
plus the 200,000 shares assumed from converting preferred stock
Earnings Per Share
1,000,000 x 12/12 = 1,000,000 500,000 x 6/12 = 250,000 Denominator amount 1,250,000
Slide 9-15
Weighted-Average Number of Shares
Optel Corporation had 1 million shares of
common stock outstanding on January 1. On July 1 it issued an additional 500,000 shares. How many weighted-average shares would be used for
calculating earnings per share?
Optel Corporation had 1 million shares of
common stock outstanding on January 1. On July 1 it issued an additional 500,000 shares. How many weighted-average shares would be used for
calculating earnings per share?
Slide 9-16
Zero-Coupon Bonds
Bonds with a total par of $100,000 and carrying zero interest are issued when the current yield is 14 percent. How much should the investor pay
for each $1,000 bond?
Bonds with a total par of $100,000 and carrying zero interest are issued when the current yield is 14 percent. How much should the investor pay
for each $1,000 bond?
$1,000 x .519 = $519 per $1,000 bond
No cash is paid by the borrower until these bonds mature.
No cash is paid by the borrower until these bonds mature.
Slide 9-17
Debt With Warrants
Some corporations issue warrants in conjunction with the issuance of bonds, putting an exercise price on the warrants of
about 15 to 20 percent above the current market price of the common stock.
Some corporations issue warrants in conjunction with the issuance of bonds, putting an exercise price on the warrants of
about 15 to 20 percent above the current market price of the common stock.
If detachable, the warrants can be removed from the debt and used to purchase
the issuer’s stock or sold to a third party.
If detachable, the warrants can be removed from the debt and used to purchase
the issuer’s stock or sold to a third party.
Slide 9-18
Debt With Warrants
If nondetachable, the debt is accounted for as if it were a convertible debt security--no recognition is
given to the equity If nondetachable, the debt
is accounted for as if it were a convertible debt security--no recognition is
given to the equity
Some corporations issue warrants in conjunction with the issuance of bonds, putting an exercise price on the warrants of
about 15 to 20 percent above the current market price of the common stock.
Some corporations issue warrants in conjunction with the issuance of bonds, putting an exercise price on the warrants of
about 15 to 20 percent above the current market price of the common stock.
Slide 9-19
Redeemable Preferred Stock
Redeemable preferred stock not only pays dividends, it may also be redeemed by the
investor on or after a certain date.
Redeemable preferred stock not only pays dividends, it may also be redeemed by the
investor on or after a certain date.
The SEC requires that redeemable preferred stock be listed as a separate item on the balance sheet at it’s redemption price. This item must be
listed between the liability and owners’ equity section and not included in the total of either
liabilities or owner’s equity.
The SEC requires that redeemable preferred stock be listed as a separate item on the balance sheet at it’s redemption price. This item must be
listed between the liability and owners’ equity section and not included in the total of either
liabilities or owner’s equity.
Slide 9-20
Redeemable Preferred Stock
Redeemable preferred stock $ 8,000,000 Stockholders’ equity:
Common stock @ $1 par 20,000,000 Additional paid-in capital 75,000,000 Total paid-in capital 95,000,000 Retained earnings 60,000,000 Total stockholders’ equity $155,000,000 Redeemable preferred stock $ 8,000,000 Stockholders’ equity:
Common stock @ $1 par 20,000,000 Additional paid-in capital 75,000,000 Total paid-in capital 95,000,000 Retained earnings 60,000,000 Total stockholders’ equityThe $8 million for $155,000,000
redeemable preferred stock is not included.
The $8 million for redeemable preferred stock is not included.
