ACCT20200 Chapter Notes - Chapter 10: Angel Investor, Initial Public Offering, Double Taxation
Ch. 10: Stockholder’s Equity
● Invested capital: amount of money paid into a company by its owners
● Corporation: entity that is legally separate from its owners and pays its own income taxes
○ Articles of incorporation describe
■ The shares of stock to be issued
■ Initial board of directors
■ The nature of the firm’s business activities
○ Stockholders control the company (have voting shares)
● Stages of equity financing: founders’ investment, friends and family investment, outside
investment, initial public offering
○ Angel investors: wealthy individuals in the business community willing to risk
investment funds
○ Venture capital firms: provide additional financing for an ownership percentage
of the company
○ Initial public offering: first time a corporation issues stock
● Publicly held corporation: allows investment by the general public and is regulated by
the SEC
● Privately held corporation: does not allow investment by the general public and has fewer
stockholders than a public corporation
● Stockholder rights: right to vote, receive dividends and right to share in the distribution of
assets if the company is dissolved
● Advantages of a corporation:
○ Limited liability: guarantees that stockholders can’t lose more than they amount
they invested in the company, even in bankruptcy
○ Transfer ownership and capital raising: ownership rights are easily transferred due
to stock share selling (attracts outside investment)
● Disadvantages of a corporation:
○ Double taxation: corporations pay income taxes on earnings and in dividends
○ More paperwork
● Common stock
○ Authorized stock: total number of shares available to sell (issued +unissued)
○ Issued stock: number of shares that have been sold to investors
■ Outstanding stock: number of issued shares held by investors (receive
dividends)
■ Treasury stock: issued shares repurchased by the company.
○ Par value: legal capital per share of stock that’s assigned when the corporation is
first established.
■ Has no relationship to the market value
■ Journal entry:
○ No-par value stock: common stock that hasn’t been assigned a par value
■ Journal entry: debit cash, credit common stock
○ Stated value: the legal capital assigned per share to no-par stock
○ Above par-value issue:
■ Additional paid in capital: portion of the cash proceeds from issuing stock
above par value
■ Journal entry: debit cash (use market value), credit common stock (use
stated value), credit additional paid in capital (difference)
● Preferred stock: has preference over common stock in the payment of dividends and the
distribution of assets
○ Features:
■ Convertible: can be converted to common stock
■ Redeemable: shares can be returned to the corporation at a fixed price
■ Cumulative: receive priority for future dividends if dividends are not
declared in a given year
● Dividends in arrears: unpaid dividends on cumulative preferred
stock
○ Issuing journal entry (above par):
■ Debit cash (shares x market value)
■ Credit:
● Preferred stock (sharex x par value)
● Additional paid in capital (difference)
