Blocher/Chen/Lin

1
9
Sources of Capital Owners Equity
Part One Financial Accounting

• The McGraw-Hill Companies, Inc., 1999

2
Forms of Business Organizations
Slide 9-1
Sole Proprietorship

• Owned by an individual
• No incorporation fees
• No special reports
• Profits taxed at proprietors personal tax rate
• Personally responsible for the entitys debts
• Borrow money as an individual

3
Forms of Business Organizations
Slide 9-2
Partnership
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
4
Forms of Business Organizations
Slide 9-3
Corporation
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
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Disadvantages of the Corporation Form
Slide 9-4

• There may be significant legal and other fees
  involved in formation.
• The corporations 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.

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Partnership Equity
Slide 9-5
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 partnerships net income
for the year is 80,000.
Total Jackson Curtin

• Salary 60,000 20,000 40,000
• Interest on capital 8,000 2,400 5,600
• Remainder 12,000 6,000 6,000
• Total 80,000 28,400 51,600

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Partnership Equity
Slide 9-6
If the partnership agreement is silent concerning
the remainder, then it is divided equally.
Total Jackson Curtin
Salary 60,000 20,000 40,000 Interest on
capital 8,000 2,400 5,600 Remainder 12,000
6,000 6,000 Total 80,000 28,400 51,600
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Recording a Common Stock Issue
Slide 9-7
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 Additi
onal Paid-In Capital 600,000
100,000 x 1
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Cash Dividend
Slide 9-8
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
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Stock Dividend
Slide 9-9
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.
5,000 x 10.50
Retained Earnings 52,500 Common Stock at
Par 5,000 Additional Paid-In Capital 47,500
5,000 x 1
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Balance Sheet Presentation
Slide 9-10
PRESTON COMPANY AND SUBSIDIARIES Consolidated
Balance Sheet At December 31 (millions)
1998 1997

• 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

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Basic Earnings Per Share
Slide 9-11
Basic earnings per share is a measurement of the
corporations per share performance over a period
of time.
Assume Nugent Corporation had net income of 7
million and 1 million shares of common stock
outstanding.
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Basic Earnings Per Share
Slide 9-12
Now, assume that Nugent Corporation also has
100,000 shares of 8 convertible preferred stock.
14
Earnings Per Share
Slide 9-13
For diluted earnings per share, we assume that
the 100,000 convertible preferred shares are
exchanged for 200,000 shares of common stock.
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Earnings Per Share
Slide 9-14
For diluted earnings per share, we assume that
the 100,000 convertible preferred shares are
exchanged for 200,000 shares of common stock.
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
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Weighted-Average Number of Shares
Slide 9-15
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?

• 1,000,000 x 12/12 1,000,000
• 500,000 x 6/12 250,000
• Denominator amount 1,250,000

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Zero-Coupon Bonds
Slide 9-16
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.
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Debt With Warrants
Slide 9-17
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.
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Debt With Warrants
Slide 9-18
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 nondetachable, the debt is accounted for as if
it were a convertible debt security--no
recognition is given to the equity character of
the debt.
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Redeemable Preferred Stock
Slide 9-19
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 its redemption price. This item must be
listed between the liability and owners equity
section and not included in the total of either
liabilities or owners equity.
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Redeemable Preferred Stock
Slide 9-20
Redeemable preferred stock
8,000,000 Stockholders equity Common stock _at_
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
The 8 million for redeemable preferred stock is
not included.
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Chapter 9
The End