Page 522 - Accounting Principles (A Business Perspective)

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Paid-in capital—Treasury stock transactions

Another source of capital is treasury stock transactions. Treasury stock is the corporation's own stock, either
preferred or common, that it has issued and reacquired. It is legally available for reissuance. By reacquiring shares
of its own outstanding capital stock at one price and later reissuing them at a higher price, a corporation can
increase its capital by the difference between the two prices. If the reissue price is less than acquisition cost,
however, corporate capital decreases. We discuss treasury stock transactions at length later in this chapter.

Paid-in capital—Donations
Occasionally, a corporation receives a gift of assets, such as a USD 500,000 building. These donated gifts
increase stockholders' equity and are called donated capital. The entry to record the gift of a USD 500,000
building is a debit to Buildings and a credit to Paid-In Capital—Donations. Accountants would make this entry in
the amount of the USD 500,000 fair market value of the gift when received.

Retained earnings
The retained earnings portion of stockholders' equity typically results from accumulated earnings, reduced by

net losses and dividends. Like paid-in capital, retained earnings is a source of assets received by a corporation.
Paid-in capital is the actual investment by the stockholders; retained earnings is the investment by the stockholders
through earnings not yet withdrawn.
The balance in the corporation's Retained Earnings account is the corporation's net income, less net losses, from
the date the corporation began to the present, less the sum of dividends paid during this period. Net income
increases Retained Earnings, while net losses and dividends decrease Retained Earnings in any given year. Thus,
the balance in Retained Earnings represents the corporation's accumulated net income not distributed to
stockholders.
When the Retained Earnings account has a debit balance, a deficit exists. A company indicates a deficit by

listing retained earnings with a negative amount in the stockholders' equity section of the balance sheet. The firm
need not change the title of the general ledger account even though it contains a debit balance. The most common
credits and debits made to Retained Earnings are for income (or losses) and dividends. Occasionally, accountants
make other entries to the Retained Earnings account. We discuss some of these entries later in the chapter.

Paid-in capital and retained earnings on the balance sheet
The following stockholders' equity section of a balance sheet presents the various sources of capital in proper
form:
Stockholders' equity:
Paid-in capital:
Preferred stock – 6%, $100 par value; authorized, issued, and $400,000
outstanding, 4,000 shares
Common stock – no-par value, $5 stated value; authorized, issued, $2,400,000
and outstanding, 400,000 shares 2,000,000
Paid-in capital -
From preferred stock issuances* $ 40,000
From donations 10,000 50,000
Total paid-in capital $2,450,000
Retained earnings 500,000
Total stockholders' equity $2,950,000
* This label is not the exact account title but is representative of the descriptions used on balance sheets. The exact account title could be used,
but shorter descriptions are often shown.

Accounting Principles: A Business Perspective 523 A Global Text