Chapter 23: Corporate Stock and Earnings IssuesCorporate Capital Structure- A sole proprietorship has a single owner- A partnership has only a few ownerso In both types, each owner has a separate Owner’s Capital account for reporting the owner’s equity on the company’s balance sheet.o The ending balance of each Owner’s Capital account includes the investments by the owner plus the owner’s share of the company’s net income earned to date less the owner’s withdrawals.- State laws require special accounting procedures for the owner’s equity of a corporation; these laws were established to protect the absentee owners of a corporation as well as its creditors.- Stockholders’ equity is the term used for the owners’ equity of a corporation.o Includes at least two parts:  Contributed capital Retained earnings- Each is governed by the laws of the state in which the company is incorporated- Basic format of the stockholders’ equity section of the corporation’s balance sheet as follows:Stockholders’ EquityContributed capitalCapital stock, $5 par, 20,000 shares authorized,10,000 shares issued and outstanding……………………….…..$ 50,000Additional paid-in capital………………………………………………… 70,000Total contributed capital……………………………………….. $120,000Retained earnings……………………………………………………………….. 90,000Total Stockholders’ Equity…………………………………………… $210,000- A corporation includes the total amount of investments made by its stockholders in Contributed Capital.- A corporation reports the balance in its Retained Earnings account as the second part of its stockholders’ equity. The amount the corporation reports in this account is the total lifetime corporate income that it has reinvested and that it has not distributed to stockholders as dividends.- Capital Stock and Legal Capitalo Capital stock is the ownership unit in a corporation.o Stockholders (or shareholders) are the owners of a corporation, and their evidence to corporate ownership is a stock certificate.o A stock certificate is a serially numbered legal document that indicates the number of shares of capital stock owned by a stockholder. May also include information such as the legal capital and the method of transferring the capital stock to another owner.- Stockholders’ Rightso Shares of stock are transferrable between individuals.o Each stockholder has the following rights: 1. The right to attend stockholders’ meetings and to vote in setting and approving major policies and actions of the corporation. Included are policies and actions concerning suchitems as mergers with other companies, acquisitions of other companies, sales of major portions of the corporation, and the issuance of additional stock and bonds. 2. The right to vote in the election of the board of directors. A board of directors is a group of individuals that has the responsibility and authority to supervise the corporation’s ordinary business activities, make future plans, and take whatever action isnecessary in managing the corporation. Voting to elect the board of directors (and the chair of the board) also takes place at the stockholders’ meetings. 3. The right to share in net income by receiving dividends from the corporation. The board of directors decides on the payment of dividends, however. 4. The right to purchase additional capital stock if issued—a right known as the preemptive right. The preemptive right is the right to maintain a proportionate (pro rata) share of additional capital stock if it is issued. The right often is very significant for small, privately held corporations for which control is very important, but it less important for corporations with large numbers of shareholders who each own a relatively small number of shares. Stockholders may give up their preemptive right, for example, to allow the corporation to acquire another company by issuing a large number of additional shares of stock to obtain sufficient capital to do so. 5. The right to share in the distribution of the assets of the corporation if it is liquidated (terminated). If a company is terminated, creditors have first priority in the collection of their claims; stockholders receive any remaining assets.- Legal Capitalo A company may issue capital stock in several ways: Cash Noncash exchanges To employees through stock options Other transactionso Because stockholders have a limited liability to protect creditors, state laws usually set a legal capital for all corporations.o Legal capital is the amount of stockholders’ equity of a corporation that is cannot distribute to stockholders (unless the company is liquidated).o A corporation may not pay dividends or reacquire capital stock if these activities will reduce the legal capital.- Par Value Stocko A common way a corporation establishes its legal capital is by assigning a par value to each share of common stock.o The par value of capital stock is a monetary amount that the corporation designates as the legal capital per share in its articles of incorporation.o The par value is printed on each stock certificate.o The total legal capital of a corporation is determined by multiplying the par value per share by the number of shares issued.o For each issuance of capital stock, a corporation records the total dollar amount of the par value in a capital stock account.o Par value of a share of capital stock is usually very low.o Since a corporation usually issues capital stock at a price much higher than the par value, the legal capital is usually only a small part of the total amount received.o The total amount the corporation receives is the market value, the price at which the stock is issued.o The par value of capital stock has no direct relationship to its market value at any time.- No-Par Stocko No-par capital stock does not have a par value. Some states require that the entire amount received by the corporation when it issues no-par stock be designated as legal capital, and the corporation records this amount in the capital stock account. Many states, however, allow the corporation’s board of directors to set a state value per share of no-par stock.o The stated value of no-par stock is the legal capital per share of stock.o The stated value per share, when