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20-2 Corporations: Formation and Capital Stock Transactions Section 1: Forming a Corporation Chapter 20 Section Objectives 1.Explain the characteristics of a corporation. 2.Describe special “hybrid” organizations that have some characteristics of partnerships and some characteristics of corporations.

20-3 Created by corporate charter issued by a state government. Can enter into contracts and own property. Can have few or many owners. Can be privately held or publicly held. Has shareholders who own the shares of stock. They are the owners of the corporation. Explain the characteristics of a corporation Objective 1

20-4 AdvantagesDisadvantages Ease of raising capital Limited liability Restricted agency Continuous existence Transferability of ownership rights Corporate income tax Governmental regulation Corporations

20-5 Subchapter S corporation. Limited liability partnerships (LLP). Limited liability companies (LLCs). “Hybrid” Business Entities Hybrid entities have characteristics of partnerships and corporations. Describe special “hybrid” organizations Objective 2

20-6 After a Corporate Charter Is Issued Shareholders elect permanent directors.Directors or shareholders approve bylaws.Board selects corporate officers.Shares are issued to individuals who have paid full purchase price of the stock. Organizers elect an acting board of directors. Officers hire employees and begin operations.

20-7 Corporations: Formation and Capital Stock Transactions Section 2: Types of Capital Stock Chapter 20 Section Objectives 3.Describe the different types of stock. 4.Compute the number of shares of common stock to be issued on the conversion of convertible preferred stock. 5. Compute dividends payable on stock.

20-8 Capital Stock Authorized shares: The number of shares that can be sold. Issued shares: The number of shares that have been sold. Outstanding shares: The number of shares still in circulation. Outstanding stock = Issued stock – Treasury stock

20-9 The price per share at which stock is bought and sold. Specified in the corporate charter and assigned to each share of stock for accounting purposes. A value assigned to no-par stock by the board of directors for accounting and legal purposes. Par Value Stated Value Market Value Capital Stock Values

20-10 CommonPreferred Stock Classes If there is only one class of stock, common stock is issued. Each share carries the same rights and privileges as every other share. Preferred stock has special claims on a corporation’s profits or, in case of liquidation, corporate assets. Describe the different types of stock Objective 3

20-11 Dividends are distributions of the profits of a corporation to its shareholders. ANSWER: QUESTION: What are dividends? The board of directors declares dividends. Compute dividends payable on stock Objective 5

20-12 Dividend Rights on Preferred Stock Cumulative preferred stock Noncumulative preferred stock Nonparticipating preferred stock Participating preferred stock

20-13 Capital Stock on the Balance Sheet  Capital stock represents the equity in a corporation.  Common stock and preferred stock are reported separately.  Since the owners of a corporation are stockholders, the equity section of the balance sheet is titled “Stockholders’ Equity.”

20-14 Corporations: Formation and Capital Stock Transactions Section 3: Recording Capital Stock Transactions Chapter 20 Section Objectives 6.Record the issuance of capital stock at par value. 7.Prepare a balance sheet for a corporation. 8.Record organization costs. 9. Record stock issued at a premium, and stock with no par value. 10. Record transactions for stock subscriptions. 11. Describe the capital stock records for a corporation.

20-15 Cash Noncash assets Services rendered Recording the Issuance of Stock Stock is issued after the purchaser has paid for it in full with one of the following: Record the issuance of capital stock at par value Objective 6

20-16 Preparing a Balance Sheet for a Corporation Objective 7

20-17 When stock is issued for more than its par value, it is issued at a premium. Premiums on stock are usually credited to an account titled Paid-in Capital in Excess of Par Value. Separate accounts are set up for different classes of stock Mar. 2 Cash 42, Preferred Stock 40, Paid-in Capital in Excess of Par Value—Preferred Stock 2, Issuance of 400 shares for $105 per share Record stock issued at a premium and stock with no par value Objective 9

20-18 Recording Rules for Par and No-Par Stock Par-Value StockNo-Par-Value Stock Stated ValueNo Stated Value Par value is specified in corporate charter. Stock certificate indicates par value. Stated value is assigned by directors. Corporate charter indicates that stock is no-par-value stock. Stock certificate does not generally show stated value. Corporate charter indicates that stock is no-par-value stock. Stock certificate shows that stock is no-par-value stock.

20-19 Recording Rules for Par and No-Par Stock (cont.) Par-Value StockNo-Par-Value Stock Stated ValueNo Stated Value Change in par value requires revision of charter. On issue of stock, par value is credited to capital stock account. Stated value can be changed by directors. On issue of stock, stated value is credited to capital stock account. On issue of stock, entire proceeds are credited to capital stock account.

20-20 Subscriptions for Capital Stock Stockholder signs a subscription contract. (It details stock price and payment plan.) Stockholder pays for stock at a later date. Stockholder receives stock when payment is made. Record transactions for stock subscriptions Objective 10

20-21 Special Corporation Records and Agents Corporations keep detailed records of stockholders’ equity and special corporate records such as: Meeting minutes Corporate bylaws Stock certificate books Stock ledgers Stock transfer records Describe the capital stock records for a corporation Objective 11