century 21 accounting © thomson/south-western 1 lesson 11-1 part 4: corporation accounting...

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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 11-1

PART 4: PART 4: CORPORATION ACCOUNTINGCORPORATION ACCOUNTING

Overview: PART 4 covers complete accounting cycle for a

corporation Chapter 11: Organizing a Corporation and Paying

Dividends Chapter 12: Acquisition of Additional capital for corp:

treasury stock and corporate bonds Chapter 13: Financial Analysis and Reporting: End-of-

fiscal period work for corporation; worksheet and financial stmts, calculating federal income tax

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LampLight, Inc, Chart of Accounts, pg 311LampLight, Inc, Chart of Accounts, pg 311

Merchandising business organized as corporation Sells lighting fixtures

Similarities: Typical divisions

Differences: Classifications within Assets and Liabilities Large number of accounts within Stockholder’s Equity Organization Expense new account

Other Expenses

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Ch.11-1: Starting a CorporationCh.11-1: Starting a Corporation

Corporation: organization with legal rights of a person and that may be owned by many persons Organized by law to exist separately and apart from its owners Limited liability

Ownership: divided into units Unit = share of stock Capital stock – total shares of ownership in a corporation Stockholder – owner of one or more shares of stock Dividends - earnings distributed to stockholders Retained earnings - earnings retained to finance future business

expansion and improvement

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Articles of IncorporationArticles of Incorporation

Elected Board of Directors: small group to represent combined interests and to be responsible for management Determines corporate policies and selects officers to supervise daily

management

Legal Requirements for forming a Corporation: Articles of Incorporation: written application requesting permission

to form a corporation (submit to state or federal government) Charter approved articles of incorporation

AKA: certificate of incorporation

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1. Nature of business.

2. Types of stock authorized.

3. Initial directors.

ARTICLES OF INCORPORATION – pg 315ARTICLES OF INCORPORATION – pg 315 page 315

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1. Names of incorporators.

2. Signatures of incorporators.

ARTICLES OF INCORPORATIONARTICLES OF INCORPORATION page 316

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Rights of StockholdersRights of Stockholders

1. To vote at stockholders’ meetings (unless an exception is made for holders of a particular kind of stock)

2. To share in a corporation’s earnings

3. To share in the distribution of the assets of the corporation if it ceases operations and sells all of its assets

Capital Stock of a Corporation: Common stock: stock that does not give stockholders

any special privileges Preferred stock: stock that gives stockholders special

privileges

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Stock Certificates:Stock Certificates:

Written evidence of the number of shares that each stockholder owns Usually states issue date, certificate number, number of shares, name of

stockholder Corporation keeps record of all stock issued to each stockholder

Stock transfer changing ownership of stock

Value of Stock: Par value: value assigned to stock and printed on certificate Par value stock: stock that has an authorized value printed on the

certificate No-par-value Stock: share of stock that has no authorized value printed

Some states require no par value stock be assigned a stated or specific value Stated-value stock: No-par-value stock that has a value assigned by a

corporation Similar to par value stock, but value is not printed on certificate

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STOCK CERTIFICATESSTOCK CERTIFICATES page 317

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Common StockCommon Stock

If corporation issues only one type of stock it is common stock

If corporation issues only common stock stockholders are entitled to all dividends

In most corporations only owners of common stock have right to vote on matters brought before stockholders

Lamplight, Inc is authorized to issue no-par-value common stock w/stated value of $10.00 Article III

Most stock sold today is common stock

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Preferred StockPreferred Stock

To attract more investors might offer preferred stock with preferences as to some of basic stockholder’s rights

Usually does not have voting rights and cannot influence how much and when dividends are paid out

Preference is to receive dividends before common stockholders

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Preferred Stock: Preferred Stock:

Others preferences: 1. Unpaid dividends may accumulate from one year to another. Accumulated

preferred dividends must be paid before common.

2. Dividends may be shared with common stockholders above a certain percentage or amount. Once dividend to common stockholders equals stated percentage of preferred stock, additional dividends may be shared between preferred and common stockholders

Every preference granted comes at expense to common stockholders

Preferred stock dividends may be stated as percentage of par value or as amount per share Ex) Lamplight has authorized the issuance of 8%, $100.00 par-value stock

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TRANSACTIONS INCURRED WHEN TRANSACTIONS INCURRED WHEN STARTING A CORPORATIONSTARTING A CORPORATION

Charter is legal authorization to begin business BUT still needs assets to operate Obtains initial capital by selling stock to incorporators

Capital Accounts of a Corporation Maintains single general ledger account for each KIND of stock issued When issuing ONLY common stock value of all stock issued is

recorded in single capital stock account When issuing BOTH separate capital stock accounts Retained Earnings used to record net income

Keeps net income separate from recorded values of issued capital stock Net income CR

Net Loss DR (DEFICIT)

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1. Write the date.

2. Enter the account title.

3. Record the receipt numbers.

4. Write the credit amount.

5. Write the debit amount.

TRANSACTIONS INCURRED WHEN TRANSACTIONS INCURRED WHEN STARTING A CORPORATIONSTARTING A CORPORATION page 319

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When formed, each of Lamplights 6 incorporators agrees to buy 5000 shares of common stock at stated value

Total = 30,000 shares @ $10.00 = $300,000.00

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ORGANIZATION COSTS OF A ORGANIZATION COSTS OF A CORPORATIONCORPORATION

1. Incorporation fee paid to the state when the articles of incorporation are submitted

2. Attorney fees for legal services during the process of incorporation3. Other incidental expenses incurred prior to receiving the charter

Cannot be formed without these costs Until it receives a charter does not exist as corporation to pay costs One of incorporators may agree to pay costs until charter is granted

After receiving charter reimbursed for costs by corp If substantial costs were recorded as expense could reduce net income

during first year Record as Asset account benefits derived from costs extend over many years

page 320

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TERMS REVIEWTERMS REVIEW

corporation board of directors articles of incorporation charter common stock preferred stock

stock certificate par value par-value stock no-par-value stock stated-value stock organization costs

page 322

***TO DO***

1. Work Together, pg 322

2. On your own, pg 322

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LESSON 11-2: Stock Subscriptions and the LESSON 11-2: Stock Subscriptions and the Balance SheetBalance Sheet

Subscribing for capital stock: entering into an agreement with a corporation to buy capital stock and pay at a later date. Future payments may be made all at once or in installment plan No voting rights

Example: Jan. 5 – Daniel Herring subscribed to 2000 shares of

common stock at $10.00/share Agreed to pay $10,000 on March 1 and $10,000 by July 1

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1. Write the date.

3. Record memorandum number.

4. Enter debit amount.

5. Enter the account credited.

6. Enter credit amount.

2. Enter the account debited.

JOURNALIZING A STOCK SUBSCRIPTIONJOURNALIZING A STOCK SUBSCRIPTION

*Stock certificates are issued only when paid in full

*Amounts will be recorded in Capital Stock – Common when paid in full and stock certificate is issued.

page 324

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JOURNALIZING CASH RECEIVED JOURNALIZING CASH RECEIVED FOR A STOCK SUBSCRIPTIONFOR A STOCK SUBSCRIPTION page 325

March 1, received cash from Herring in payment of half of stock subscription

Similar entry will be made on July 1 when he makes second, final payment

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JOURNALIZING ISSUANCE OF STOCK JOURNALIZING ISSUANCE OF STOCK PREVIOUSLY SUBSCRIBEDPREVIOUSLY SUBSCRIBED

When subscription is fully paid certificate is issued If stockholder decides to sell stock at later date no

journal entry does not generate additional capital Name of new stockholder must be entered in stock

ownership records for future dividend pymts

page 325

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1. List intangible assets as the last category of assets.

2. List sources of paid-in capital.

BALANCE SHEET OF A NEWLY FORMED BALANCE SHEET OF A NEWLY FORMED CORPORATIONCORPORATION

Cash = $300,000-2400

Intangible assets – non-physical, but hold value

page 326

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subscribing for capital stock intangible assets

TO DO:



3. App 11-1, 11-2

page 327

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Ch11-3: Calculating and Journalizing Ch11-3: Calculating and Journalizing Dividends for a CorporationDividends for a Corporation

Declaring a dividend: action by board of directors to distribute corporate earnings to stockholders

Three important dates in distributing a dividend: Date of declaration: date on which BOD votes to distribute Date of record: date that determines which stockholders are to

receive dividends May buy and sell stocks at any time but person listed on stockholder on

date of record will receive dividends

Date of payment: date on which dividends are actually to be paid Several weeks after date of record corporation has time to determine

who is entitled to receive dividends and prepare checks to be mailed

Transactions are recorded on date of declaration and date of payment

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Declaring Dividends: Declaring Dividends:

On date of declarations incurs liability that must be recorded

BOD has decided to declare annual dividend of $24,000.

On date of record: 1000 shares of 8%, $100 par-value preferred stock 16,000 shares of $20.00 stated-value common stock

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Calculating Value of Preferred Stock

DIVIDENDSDIVIDENDS page 328

Number of Preferred Shares

Par Value =Value of

Preferred Stock×

1,000 $100.00 = $100,000.00×

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Calculating Value of Common Stock

Number of Common Shares

Stated Value =Value of

Common Stock×

16,000 $20.00 = $320,000.00×

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Calculating Dividend of Preferred Stock

=×Value of

Preferred StockPreferred

Dividend RatePreferred

Dividend Amount

$100,000.00 8% = $8,000.00×

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Calculating Amount Available for Common Dividends

Total Amount Available for Dividends

Preferred Dividend Amount

=Amount Available

for Common Dividends

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$24,000.00 $8,000.00 = $16,000.00–

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DIVIDENDSDIVIDENDS

If company decides to increase its annual dividend preferred stock will never exceed 8%

Additional dividends may go to Common stock, increasing the dividend rate

page 329

Calculating Dividend Rate for Common Stock

Common Dividend Amount

Value of Common Stock

=Common Dividend

Rate÷

$16,000.00 $320,000.00 = 5%÷

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JOURNALIZING JOURNALIZING DECLARATION OF DIVIDENDDECLARATION OF DIVIDEND page 330

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JOURNALIZING PAYMENT OF A DIVIDENDJOURNALIZING PAYMENT OF A DIVIDEND

Business issues single check for dividend deposited in special dividend checking account

Separate check to each eligible stockholder is written against special account Avoids large number of entries in journals Reserves cash specifically for paying dividends

Dividend check is given to agent (bank) who handles details of preparing and mailing individual checks

page 330

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declaring a dividend date of declaration date of record date of payment

TO DO:



3. App Prob 11-3, 11-4

page 332

century 21 accounting © thomson/south-western 1 lesson 11-1 part 4: corporation accounting...

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