Corporations: Organization, Stock Transactions, and Dividends

1. 11 Corporations: Organization, Stock Transactions, and Dividends Student Version

2. 1 Describe the nature of the corporate form of organization. 11-2

3. 1 Characteristics of a Corporation • A corporation has separate legal existence from its owners. • A corporation has transferable units of ownership. • A corporation has limited stockholders’ liability.

4. 1 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:

5. 2 Describe the two main sources of stockholders’ equity. 11-5

6. 2 The two sources of capital are: • Capital contributed to the corporation by the stockholders, called paid-in capital or contributed capital. • Net income retained in the business, called retained earnings.

7. 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.

8. 3 Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. 11-8

9. 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.

10. 3 Characteristics of Stock 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.

11. 3 Classes of Stock • 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.

12. 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. These stock rights normally vary with the class of stock.

13. 3 Classes of Stock 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.

14. 3 Cumulative Preferred Stock Cumulative preferred stock has a right to receive regular dividends that were not declared (paid) in prior years. Noncumulative preferred stock does not have this right.

15. 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.

16. 3 If the stock is issued (sold) for a price that is more than its par, the stock has been sold at a premium. If the stock is issued (sold) for a price that is less than its par, the stock has been sold at a discount.

17. 3 Premium on Stock Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.

18. 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.

19. 3 No-Par Stock On January 9, a corporation issues 10,000 shares of no-par common stock at $40 a share. On June 27, the corporation issues an additional 1,000 shares at $36.

20. 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 valueper share.

21. 3 Using the same data as we used for par the transaction at stated value is recorded as follows:

22. 4 Describe and illustrate the accounting for cash dividends and stock dividends. 11-22

23. 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

24. 4 Date of Declaration The date of declaration is the date the board of directors formally authorized the payment of the dividend. On this date, the corporation incurs the liability to pay the amount of the dividend.

25. 4 Date of Record The date of record is the date the corporation used to determine which stockholders will receive the dividend.

26. 4 Date of Payment The date of payment is the date the corporation will pay the dividends to the stockholders who owned the stock on the date of record.

27. 4 On October 1, Hiber Corporation declares the cash dividends shown below with a date of record of November 10 and a date of payment of December 2. Dividend per Share Total Dividends Preferred stock, $100 par, 5,000 shares outstanding… $2.50 $12,500 Common stock, $10 par, 100,000 shares outstanding $0.30 30,000 Total……………………………... $42,500

28. 4 On October 1, the declaration date, Hiber Corporation records the following entry:

29. 4 On December 2, the date of payment, Hiber Corporation records the payment of the dividend as follows:

30. 4 Stock Dividends A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend.

31. 4 On December 15, the board of directors of Hendrix Corporation declares a 5% stock dividend of 100,000 shares (2,000,000 shares × 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.

32. 4 The entry to record the declaration of the 5 percent stock dividend is as follows:

33. 4 On January 10, the number of shares outstanding is increased by 100,000. The following entry records the issue of the stock:

34. 5 Describe and illustrate the accounting for treasury stock transactions. 11-34

35. 5 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.

36. 5 Later, 600 shares of treasury stock were sold for $60 per share. * *The amount debited to Treasury Stock per share when purchased is the amount per share that must be credited to that account when sold.

37. 5 On October 4, the corporation sells the remaining 400 shares of treasury stock for $40 per share.

38. 6 Describe and illustrate the reporting of stockholders’ equity. 11-38

39. Exhibit 5 6 Stockholders’ Equity Section of a Balance Sheet Method 1 (continued)

40. Exhibit 5 6 Stockholders’ Equity Section of a Balance Sheet (continued) Method 2

41. 6 Exhibit 6 Retained Earnings Statement

42. 7 Describe the effect of stock splits on corporate financial statements. 11-42

43. 7 Stock Split A stock split is a process by which a corporation reduces the par or stated value of the common stock and issues a proportionate number of additional shares.

44. 7 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. A stock split does not require a journal entry.