click to edit master title style 1 1 1 13 corporations: organization, stock transactions, and...

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13Corporations: Corporations:

Organization, Stock Organization, Stock Transactions, and Transactions, and

DividendsDividends


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Characteristics of a Corporation

A corporation is a legal entity, distinct and separate from the

individuals who create and operate it. As a legal entity, a corporation may acquire, own, and dispose of

property in its own name.


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The stockholders or shareholders who own the stock

own the corporation. Corporations whose shares of

stock are traded in public markets are called public corporations.


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Corporations whose shares are not traded publicly are usually owned by

a small group of investors and are called nonpublic or private

corporations. The stockholders of all corporation have limited liability.

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The stockholders control a corporation by electing a board of

directors. The board meets periodically to establish corporate

policy. It also selects the chief executive officer (CEO) and other

major officers.

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EmployeesEmployees

StockholdersStockholders

OfficersOfficers

Board of DirectorsBoard of Directors

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Exhibit 1 Organizational Structure of a Corporation


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Advantages of the Corporate Form

A corporation exists separately from its owners.

A corporation’s life is separate from its owners; therefore, it exists indefinitely.

The corporate form is suited for raising large amounts of money from stockholders.

(Continued)


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Advantages of the Corporate Form

A corporation sells shares of ownership, called stock. Stockholders can transfer their shares of stock to other stockholders.

A corporation’s creditors usually may not go beyond the assets of the corporation to satisfy their claims.

(Concluded)


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Disadvantages of the Corporate Form

Stockholders control management through a board of directors.

As a separate legal entity, the corporation is subject to taxation. Thus, net income distributed as dividends will be taxed at both the corporate and individual levels.

Corporations must satisfy many regulatory requirements.


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Organization Structure of a Corporation

Costs may be incurred in organizing a corporation. The recording of a corporation’s organizing costs of $8,500 on January 5 is shown below:

Jan. 5 Organizational Expense 8 500 00

Cash 8 500 00

Paid costs of organizing

the corporation.


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Describe the two main sources of

stockholders’ equity.

Objective 2Objective 2Objective 2Objective 2

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The owner’s equity in a corporation is called stockholders’ equity,

shareholders’ equity, shareholders’ investment, or capital.


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The two sources of capital found in the Stockholders’ Equity section of a balance sheet are paid-in capital or

contributed capital (capital contributed to the corporation by

stockholders and others) and retained earnings (net income

retained in the business).

Stockholders’ Equity


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Stockholders’ Equity Section of a Corporate Balance Sheet

Stockholders’ EquityPaid-in capital: Common stock $330,000Retained earnings 80,000 Total stockholders’ equity $410,000

If there is only one class of stock, the account is entitled Common Stock or Capital Stock.


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A debit balance in Retained Earnings is called a deficit. Such a balance results from

accumulated net losses.


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Describe and illustrate the characteristics of stock,

classes of stock, and entries for issuing stock.


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Characteristics of Stock

The number of shares of stock that a corporation is authorized to issue is stated in the charter. A corporation

may reacquire some of the stock that has been issued. The stock remaining

in the hands of stockholders is then called outstanding stock.


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Shares of stock are often assigned a monetary amount, called par. Corporations may issue stock

certificates to stockholders to document their ownership. Some corporations

have stopped issuing stock certificates except on special request.


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Stock issued without a par is called no-par stock. Some states require the board of directors to assign a stated

value to no-par stock.

Some state laws require that corporations maintain a minimum

stockholder contribution, called legal capital, to protect creditors.


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AuthorizedAuthorized

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Number of Shares Authorized, Issued, and Outstanding

IssuedIssuedOutstandingOutstanding


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1. The right to vote in matters concerning the corporation.

2. The right to share in distributions of earnings.

3. The right to share in assets on liquidation.

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Major Rights That Accompany Ownership of a Share of Stock


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The two primary classes of paid-in capital are common stock and preferred stock. The primary

attractiveness of preferred stocks is that they are preferred over common

as to dividends.

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Two Primary Classes of Paid-In Capital


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A corporation has 1,000 shares of $4 preferred stock and 4,000 shares of common stock outstanding. The net income, amount of earnings retained, and the amount of earnings distributed are as follows:

Net income $20,000 $9,000 $62,000Amount retained 10,000 6,000 40,000Amount distributed $10,000 $3,000 $22,000

2006 2007 2008


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Dividends to Common and Preferred Stock


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A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and 100,000 shares of

common stock, $20 par. One-half of each class of authorized shares is issued at par for cash.

Issuing Stock

Cash 1,500 000 00

Issued preferred stock and

common stock at par for cash.

Preferred Stock 500 000 00

Common Stock 1,000 000 00


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When a stock is issued for a price that is more than its par, the stock has sold at a premium. When stock is

issued for a price that is less than its par, the stock has

sold at a discount.


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Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.

Cash 110 000 00

Issued $50 par preferred stock at $55.

Preferred Stock100 000 00

Paid-in Capital in Excess of

Par—Preferred Stock10 000 00

Premium on Stock


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13-3A corporation acquired land for which the fair market

value cannot be determined. The corporation issued 10,000 shares of $10 par common that has a current

market value of $12 in exchange for the land.

Land 120 000 00

Issued $10 par common stock

valued at $12 per share, for

land.

Common Stock100 000 00

Paid-in Capital in Excess of Par20 000 00


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A corporation issues 10,000 shares of no-par common stock at $40 a share.

Cash 400 000 00

Issued 10,000 shares of no-

par common stock at $40.


No-Par Stock


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At a later date, the corporation issues 1,000 additional shares at $36.

Cash 36 000 00

Issued 1,000 shares of no-par

common stock at $36.


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Stated Value

Some states require that the entire proceeds from the issue of no-par stock be recorded

as legal capital. In other states, no-par stock may be assigned a stated value per

share.


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Using the same data as we used for par the transaction is recorded as follows:

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Cash 400 000 00


par common at $40. Stated

value, $25.


Stated Value

Paid-in Capital in Excess of

Stated Value 150 000 00


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Cash 36 000 00


par common at $36. Stated

value, $25.

Common Stock25 000 00 Paid-in Capital in Excess of

Stated Value 11 000 00

The corporation issued 1,000 shares of no-par common stock at $36 (stated value, $25).


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Journalize the entries for cash dividends and

stock dividends.


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Today’s Stock Market Report• Knives are up sharply

• Dairy cows were steered into a bull market

• Pencils lost a point

• Hiking gear is trailing


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Cash Dividends

A cash distribution of earnings by a corporation to its stockholders is called a cash dividend. There are usually three conditions that a corporation must meet to pay a cash dividend.

1. Sufficient retained earnings

2. Sufficient cash

3. Formal action by the board of directors


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First is the date of declaration. Assume that on December 1, Hiber Corporation declares a $42,500 dividend ($12,500 to

the 5,000 preferred stockholders and $30,000 to the 100,000 common stockholders.

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Three Important Dividend Dates


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Dec. 1 Cash Dividends 42 500 00

Declared cash dividend.

Cash Dividends Payable42 500 00

Heber Corporation records the $42,500 liability on the declaration date.

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The second important date is the date of record. For Hiber

Corporation this would be December 10. No entry is

required since this date merely determines which stockholders

will receive the dividend.

Three Important Dividend Dates 13-4


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The third important date is the date of payment. On January 2, Hiber issues dividend checks.

Three Important Dividend Dates

Jan. 2 Cash Dividends Payable 42 500 00

Paid cash dividend.

Cash 42 500 00

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A distribution of dividends to stockholders in the form of the firm’s own shares is

called a stock dividend.

Stock Dividends 13-4


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On December 15, the board of directors of Hendrix Corporation declares a 5% stock dividend of

100,000 shares (2,000,000 shares x 5%) to be issued on January 10 to

stockholders of record on December 31. The market price on the

declaration date is $31 a share.

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Dec. 15 Stock Dividend (100,000 x $31 market) 3,100 000 00

Declared 5% (100,000 share)

stock dividend on $20 par

common stock with a market

value of $31 per share.

Stock Dividend Distributable

2,000 000 00 Paid-in Capital in Excess of

Par—Common Stock 1,100 000 00

The entry to record the declaration of the 5 percent stock dividend is as follows:


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Jan. 10 Stock Dividends Distributable 2,000 000 00

Issued stock for the stock

dividend.

Common Stock2,000 000 00

On January 10, the number of shares out-standing is increased by 100,000. The following entry records the issue of the stock:


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Journalize the entries for treasury stock

transactions.


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Today’s Stock Report• Analysts reported the cereal market popped

after a cold snap causing Kellogg stock to crackle

• Kimberly-Clark reported that while Huggies dropped, Cottonelle cleaned up the market and Scott tissue touched a new bottom

• Meanwhile, Coca-Cola fizzled• While Pepsi went flat


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Occasionally, a corporation buys back its own stock to provide shares for resale to employees, for reissuing

as a bonus to employees, or for supporting the market price of the stock. This stock is referred to as

treasury stock.

Treasury Stock Transactions 13-5


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On January 5, a firm purchased 1,000 shares of treasury stock (common stock, $25 par)

at $45 per share. The cost method for accounting for treasury stock is used.

Treasury Stock 45 000 00

Purchased 1,000 shares of

treasury stock at $45.

Cash45 000 00

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Later, 200 shares of treasury stock were sold for $60 per share.

Cash 12 000 00

Sold 200 of treasury stock

at $60.

Treasury Stock*9 000 00

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Paid-in Capital from Sale of

Treasury Stock

3 000 00

*The amount debited to Treasury Stock per share when purchased is the amount per share that must be credited to that account when sold.


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Sold 200 shares of treasury stock at $40 per share.

Cash 8 000 00

Sold 200 of treasury stock

at $40.

Treasury Stock9 000 00

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Paid-in Capital from Sale of

Treasury Stock 1 000 00


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Describe and illustrate the reporting of

stockholders’ equity.


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Today’s Stock Market Report• The price of Helium is up

• Feathers are down

• The paper industry is stationary

• Fluorescent tubing was dimmed today with light trading


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Stockholders’ Equity Section of a Balance Sheet


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Retained Earnings Statement

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Restrictions 13-6

The retained earnings available for use as dividends may be limited by the actions of a corporation’s board of directors. These amounts, called

restrictions or appropriations, remain part of the retained earnings.

However, they must be disclosed, usually in the notes to the financial

statements.


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Statement of Stockholders’ Equity77


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Describe the effect of stock splits on

corporate financial statements.


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Today’s Stock Market Report• Elevators rose while escalators continued their

slow decline

• Weights were up in heavy trading

• Light switches were off

• Mining industry hit rock bottom


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A corporation sometimes reduces the par or stated value

of their common stock and issues a proportionate number

of additional shares. This process is called a stock split.

Stock Splits 13-7


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Rojek Corporation has 10,000 shares of $100 par common stock outstanding with a current market price

of $150 per share. The board of directors declares a

5-for-1 stock split.


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BEFORE BEFORE STOCK SPLITSTOCK SPLIT

4 shares, $100 par

$400 total par value

20 shares, $20 par

AFTER 5:1 AFTER 5:1 STOCK SPLITSTOCK SPLIT

$400 total par value

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Since a stock split changes only the par or stated value and the number of shares outstanding, it is not recorded by a journal entry. The details of the stock split are normally disclosed in the notes to the financial statements.


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1. Describe the nature of the corporate form of organization.

2. Describe the two main sources of stockholders’ equity.

3. Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock.

After studying this chapter, you should be able to:


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4. Journalize the entries for cash dividends and stock dividends.

5. Journalize the entries for treasury stock transactions.

6. Describe and illustrate the reporting of stockholders’ equity.

7. Describe the effect of stock splits on corporate financial statements.

After studying this chapter, you should be able to:


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Describe the nature of the corporate form of

organization.


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1. First step in forming a corporation is to file an application of incorporation with the state.

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Forming a Corporation

Because state laws differ, corporations often organize in states with more favorable laws.

More than half of the largest companies are incorporated in Delaware (see Exhibit 3 in Slide 14).

(Continued)


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Examples of Corporations and Their States of Incorporation

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2. After the application is approved, the state grants a charter or articles of incorporation which formally create the corporation.

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3. Management and the board of directors prepare bylaws which are operation rules and procedures.

Forming a Corporation

(Concluded)

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