Review the characteristics of a corporation

1 Review the characteristics of a corporation

Advantages and Disadvantages of Corporations DISADVANTAGES Ownership and management separated. Double taxation Government regulation is expensive Start-up costs are higher ADVANTAGES • Corporations can raise more money • Corporations have continuous life • Ownership transfer is easy • No mutual agency • Stockholders have limited liability

Corporate Organization • Authorization–State’s permission to operate • Authorized stock–How many shares of a class of stock a corporation may issue • Capital stock–Represents ownership of the corporation's capital • Stock certificate–Paper evidencing ownership in a corporation • Company name • Stockholder name • Number of shares owned • Outstanding stock–Stock held by stockholders

S12-1: Corporation characteristics Due to the recent beef recalls, Southern Steakhouse is considering incorporating. Bill, the owner, wants to protect his personal assets in the event the restaurant is sued. Which advantage of incorporating is most applicable? Stockholders have limited liability.

2 Describe the two sources of stockholders’ equity and the classes of stock

Stockholders’ Equity Basics Paid-in capital(Contributed capital) Retained earnings Earned by profitable operations Internally generated Results from internal corporate decisions to retain net income for use in the company • Amounts received from stockholders • Common stock is main source • Externally generated • Resulting from transactions with outsiders

Classes of Stock Common stock Preferred stock Certain advantages over common stock Receive dividends before common Fixed dividend amount Upon liquidation, receive assets before common Also have basic rights of common stockholders unless withheld • Four basic rights • Vote—voting on corporate matters • Dividends—receive a proportionate part of dividend declared • Liquidation—receive a proportionate part of assets remaining • Preemption—maintain their proportionate ownership

Par, Stated and No-par Par value No-par No arbitrary amount assigned Could have a stated value Stated value treated as par • Arbitrary amount assigned to a share of stock • Set when the corporate charter is filed • Usually set low as to avoid legal difficulties

3 Journalize the issuance of stock and prepare the stockholders’ equity section of a corporation balance sheet

Accounting for the Issuance of Stock • Sell directly to stockholders • Use an underwriter/brokerage firm • Buys unsold stock • Issue price–price received for issuing stock • Usually exceeds par value • Stock exchange– here public company stock is traded • NYSE–New York Stock Exchange • Wall Street Journal • Tombstone—an advertisement for initial sale of a stock

Accounting for the Issuance of Stock • Issuing common stock at par • Issuing common stock above par • Amount received above par is called a premium • Not a gain; called additional paid-in capital • Another account is created for the premium amount

Stockholders’ Equity Presentation • The balance of the Common stock account is calculated Total Paid-in capital is the sum of Common stock plus Paid-in capital in excess of par

Accounting for Stock Issuances • No-par stock • No Paid-in capital in excess of par account needed • Full amount received is credited to Common stock • Balance sheet shows only the Common stock account

Accounting for Stock Issuances • Stated value stock • Similar to accounting for par value stock • Amount above stated value is credited to Paid-in capital in excess of stated value • Issuing stock for assets other than cash • Asset is debited for its fair value • Building is debited instead of cash

Accounting for Stock Issuances • Issuing preferred stock • Similar to issuing common stock, except Preferred stock is credited at par value • Preferred stock usually is not issued above par

Stockholders’ Equity on the Balance Sheet • Equity accounts are listed in the following order on the balance sheet: Preferred stock , Common stock, Retained earnings

S12-5: Issuing stock and interpreting stockholders’ equity Scifilink.com issued stock beginning in 2012 and reported the following on its balance sheet at December 31, 2012: Common stock, $ 2.00 par value Authorized: 6,000 shares Issued: 4,000 shares $ 8,000 Paid-in capital in excess of par 4,000 Retained earnings 26,500 Requirement: Journalize the company’s issuance of the stock for cash.

S12-5: Issuing stock and interpreting stockholders’ equity • Common stock, $ 2.00 par value • Authorized: 6,000 sharesIssued: 4,000 shares $ 8,000 Paid-in capital in excess of par 4,000 • Retained earnings 26,500

E12-15: Issuing stock Susie Systems completed the following stock issuance transactions: May 19 Issued 2,000 shares of $1 par common stock for cash of $9.50 per share. June 3 Sold 300 shares of $3, no-par preferred stock for $15,000 cash. June 11 Received equipment with market value of $78,000. Issued 3,000 shares of the $1 par common stock in exchange. Requirements: 1. Journalize the transactions. Explanations are not required. 2. How much paid-in capital did these transactions generate for Susie Systems?

E12-15: Issuing stock Susie Systems completed the following stock issuance transactions: May 19 Issued 2,000 shares of $1 par common stock for cash of $9.50 per share.

E12-15: Issuing stock Susie Systems completed the following stock issuance transactions: June 3 Sold 300 shares of $3, no-par preferred stock for $15,000 cash.

E12-15 : Issuing stock Susie Systems completed the following stock issuance transactions: June 11 Received equipment with market value of $78,000. Issued 3,000 shares of the $1 par common stock in exchange.

E12-15: Issuing stock 2. How much paid-in capital did these transactions generate for Susie Systems? $112,000

4 Illustrate Retained earnings transactions

Retained Earnings • Closing entries • Step 1 – Close Revenues • Step 2 – Close Expenses

Retained Earnings • Closing entries • Step 3 – Close Income summary

Deficit Balance • A loss causes Retained earnings to decrease • A debit balance in Retained earnings is a deficit

Deficit Balance on Balance Sheet • A deficit is reported as a negative amount

S12-7: Closing entries The data for Amanda’s Tax Service, Inc., for the year ended August 31, 2012, follow: Journalize the required closing entries for the year. Step 1

S12-7: Closing entries The data for Amanda’s Tax Service, Inc., for the year ended August 31, 2012, follow: 2. What is the balance in Retained earnings after the closing entries are posted?

5 Account for cash dividends

Accounting for Cash Dividends • Sometimes a state prohibits using Paid-in capital for dividends • Legal capital is the portion of equity unavailable for dividends • Dividends are declared before paying • Three dates: • Declaration date–Board declares a dividend and creates a liability • Date of record–determines which stockholders receives dividends • Payment date–pay dividends and remove liability

Declaring and Paying Dividends • Preferred dividends expressed as either: • A percent of par value • Or a flat dollar amount per share • Common dividends are expressed as a dollar amount per share 2,000 shares of $100 par 8% preferred = $16,000 dividend 2,000 shares of no-par $3 preferred = $6,000 dividend

Declaring and Paying Dividends • Declaration date • Date of Record (no entry) • Payment date

Dividing Dividends Between Preferred and Common • Preferred stockholders receive dividends before common • Common stockholders receive dividends if total declared is large enough to cover preferred

Cumulative and Noncumulative Preferred Stock • Cumulative preferred stock • Accumulates dividends each year until the dividends are paid • Dividends in arrears—dividends passed or not paid • Noncumulative preferred stock • Dividends not paid do not accumulated from one year to the next • Dividend in arrears are paid first, then current dividends paid

Cumulative and Noncumulative Preferred Stock • A company declares $50,000 for dividends • In arrears, 1 year at $6,000 • Preferred gets $6,000 in arrears + $6,000 current • Common receives the remainder • Journal entry

S12-8 : Accounting for cash dividends Frenchvanilla Company earned Net income of $75,000 during the year ended December 31, 2012. On December 15, Frenchvanilla declared the annual cash dividend on its 5% preferred stock (par value, $115,000) and a $0.50 per share cash dividend on its common stock (55,000 shares). Frenchvanilla then paid the dividends on January 4, 2013. Journalize for Frenchvanilla: a. Declaring the cash dividends on December 15, 2012.

S12-8 : Accounting for cash dividends (Continued) Journalize for Frenchvanilla: b. Paying the cash dividends on January 4, 2013.

6 Use different stock values in decision making

Different Values of Stock

Book Value of Preferred Stock • Book value attributed to preferred stock + any preferred dividends that are in arrears • Book value attributed to preferred stock is either • the number of outstanding preferred shares times liquidation value per share, OR • the book value of preferred equity (the Preferred stock account balance) • Plus any dividends that are in arrears, if the preferred stock is cumulative.

Book Value per Share

S12-10 : Book value per share of common stock Bronze Tint Trust has the following stockholders’ equity: Bronze Tint has not declared preferred dividends for five years (including the current year).

S12-10: Book value per share of common stock Compute the book value per share of Bronze Tint’s preferred and common stock.

S12-10: Book value per share of common stock Compute the book value per share of Bronze Tint’s preferred and common stock. (*$ 0.73645833 rounded)

Review the characteristics of a corporation