Corporations: Organization, Stock Transactions, and Dividends

1. 0 13 Corporations: Organization, Stock Transactions, and Dividends

2. 0 After studying this chapter, you should be able to: • Describe the nature of the corporate form of organization. • Describe the two main sources of stockholders’ equity. • Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock.

3. 0 After studying this chapter, you should be able to: • Journalize the entries for cash dividends and stock dividends. • Journalize the entries for treasury stock transactions. • Describe and illustrate the reporting of stockholders’ equity. • Describe the effect of stock splits on corporate financial statements.

4. 0 13-1 Objective 1 Describe the nature of the corporate form of organization.

5. 0 13-1 Characteristics of a Corporation A corporationis 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.

6. 0 13-1 The stockholders or shareholderswho own the stock own the corporation. Corporations whose shares of stock are traded in public markets are called public corporations.

7. 0 13-1 Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called nonpublicorprivate corporations. The stockholders of all corporation have limited liability.

8. 0 13-1 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.

9. 0 13-1 Exhibit 1 Organizational Structure of a Corporation Stockholders Board of Directors Officers Employees 9

10. 0 13-1 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)

11. 0 13-1 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)

12. 0 13-1 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.

13. 0 13-1 Forming a Corporation • First step in forming a corporation is to file an application of incorporationwith the state. • 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)

14. 0 13-1 Examples of Corporations and Their States of Incorporation 14

15. 0 13-1 Forming a Corporation • After the application is approved, the state grants a charteror articles of incorporationwhich formally create the corporation. • Managementand the board of directorspreparebylawswhich are operation rules and procedures. (Concluded)

16. 0 13-1 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. 16

17. 0 13-2 Objective 2 Describe the two main sources of stockholders’ equity.

18. 0 13-2 The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, orcapital.

19. 0 13-2 Stockholders’ Equity The two sources of capital found in the Stockholders’ Equity section of a balance sheet are paid-incapital or contributed capital (capital contributed to the corporation by stockholders and others) and retained earnings (net income retained in the business).

20. 0 13-2 Stockholders’ Equity Section of a Corporate Balance Sheet Stockholders’ Equity Paid-in capital: Common stock $330,000 Retained 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. 20

21. 0 13-2 A debit balance in Retained Earningsis called a deficit. Such a balance results from accumulated net losses.

22. 0 13-3 Objective 3 Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock.

23. 0 13-3 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.

24. 0 13-3 Shares of stock are often assigned a monetary amount, called par. Corporations may issue stockcertificatesto stockholders to document their ownership. Some corporations have stopped issuing stock certificates except on special request.

25. 0 13-3 Stock issued without a par is called no-par stock. Some states require the board of directors to assign a statedvalue to no-par stock. Some state laws require that corporations maintain a minimum stockholder contribution, calledlegal capital, to protect creditors.

26. 0 13-3 Number of Shares Authorized, Issued, and Outstanding Outstanding Authorized Issued 26

27. 0 13-3 Major Rights That Accompany Ownership of a Share of Stock • The right to vote in matters concerning the corporation. • The right to share in distributions of earnings. • The right to share in assets on liquidation.

28. 0 13-3 Two Primary Classes of Paid-In Capital 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.

29. 0 13-3 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 $62,000 Amount retained 10,000 6,000 40,000 Amount distributed $10,000 $3,000 $22,000 200620072008 29

30. 0 13-3 Dividends to Common and Preferred Stock 30

31. Example Exercise 13-1 0 13-3 Sandpiper Company has stock 20,000 shares of 1% preferred stock of $100 par and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1: $10,000 Year 2: 25,000 Year 3: 80,000 Determine the dividends per share for preferred and common stock for each year. 31

32. Follow My Example 13-1 Year 1Year 2Year 3 Amount distributed $10,000 $25,000 $80,000 Preferred dividend (20,000 shares) 10,000 20,000 20,000 Common dividend (100,000 shares) $ 0 $ 5,000 $60,000 0 13-3 Dividends per share: Preferred $0.50 $1.00 $1.00 Common stock None $0.05 $0.60 32 For Practice: PE 13-1A, PE 13-1B

33. 0 13-3 Issuing Stock 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. Cash 1,500 000 00 Preferred Stock 500 000 00 Common Stock 1,000 000 00 Issued preferred stock and common stock at par for cash. 33

34. 0 13-3 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.

35. 0 13-3 Premium on Stock Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. Cash 110 000 00 Preferred Stock 100 000 00 Paid-in Capital in Excess of Par—Preferred Stock 10 000 00 Issued $50 par preferred stock at $55. 35

36. 0 13-3 A 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 Common Stock 100 000 00 Paid-in Capital in Excess of Par 20 000 00 Issued $10 par common stock valued at $12 per share, for land. 36

37. 0 13-3 No-Par Stock A corporation issues 10,000 shares of no-par common stock at $40 a share. Cash 400 000 00 Common Stock 400 000 00 Issued 10,000 shares of no-par common stock at $40. 37

38. 0 13-3 At a later date, the corporation issues 1,000 additional shares at $36. Cash 36 000 00 Common Stock 36 000 00 Issued 1,000 shares of no-par common stock at $36. 38

39. 0 13-3 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.

40. 0 13-3 Stated Value Using the same data as we used for par the transaction is recorded as follows: Cash 400 000 00 Common Stock 250 000 00 Paid-in Capital in Excess of Stated Value 150 000 00 Issued 10,000 shares of no-par common at $40. Stated value, $25. 40

41. 0 13-3 The corporation issued 1,000 shares of no-par common stock at $36 (stated value, $25). Cash 36 000 00 Common Stock 25 000 00 Paid-in Capital in Excess of Stated Value 11 000 00 Issued 1,000 shares of no-par common at $36. Stated value, $25. 41

42. Example Exercise 13-2 0 13-3 On March 6, Limerick Corporation issued for cash 15,000 shares of no-par common stock at $30. On April 13, Limerick issued at par 1,000 shares of 4%, $40 par preferred stock for cash. On May 19, Limerick issued for cash 15,000 shares of 4%, $40 par preferred stock at $42. Journalize the entries to record the March 6, April 13, and May 19 transactions. 42

43. Follow My Example 13-2 0 13-3 Mar. 6 Cash 450,000 Common Stock 450,000 (15,000 shares x $30) Apr. 13 Cash 40,000 Preferred Stock 40,000 (1,000 shares x $40) May 19 Cash 630,000 Preferred Stock 600,000 Paid-in Capital in Excess of Par 30,000 (15,000 shares x $42) 43 For Practice: PE 13-2A, PE 13-2B

44. 0 13-4 Objective 4 Journalize the entries for cash dividends and stock dividends.

45. 0 13-4 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. • Sufficient retained earnings • Sufficient cash • Formal action by the board of directors

46. 0 13-4 Three Important Dividend Dates 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.

47. 0 13-4 Heber Corporation records the $42,500 liability on the declaration date. Dec. 1 Cash Dividends 42 500 00 Cash Dividends Payable 42 500 00 Declared cash dividend. 47

48. 0 13-4 Three Important Dividend Dates 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.

49. 0 13-4 Three Important Dividend Dates The third important date is the date of payment. On January 2, Hiber issues dividend checks. Jan. 2 Cash Dividends Payable 42 500 00 Cash 42 500 00 Paid cash dividend. 49

50. Example Exercise 13-3 Follow My Example 13-3 0 13-4 The important dates in connection with a cash dividend of $75,000 on a corporation’s common stock are February 26, March 30, and April 2. Journalize the entries required on each date. Feb. 26 Cash Dividends 75,000 Cash Dividends Payable 75,000 Mar. 30 No entry required. Apr. 2 Cash Dividends Payable 75,000 Cash 75,000 50 For Practice: PE 13-3A, PE 13-3B