Corporations: Organization and Capital Stock Chapter 18

Defining a corporation; establishing a corporation; Learning Objective 1 Defining a corporation; establishing a corporation; listing the advantages and disadvantages of a corporation.

Learning Unit 18-1 (Forming a Corporation) Incorporators write up and submit articles of incorporation to the state. Step 1 The Secretary of State issues a charter. Step 2 Stockholders are the owners. Step 3 A board of directors is elected by stockholders at the first meeting. Step 4

Learning Unit 18-1 (Forming a Corporation) What are some advantages of the corporate form of organization? Limited liability/separate legal entity Unlimited life Ease of transferring ownership No mutual agency Ease of raising capital

Learning Unit 18-1 (Forming a Corporation) What are some disadvantages? Difficulties in forming a corporation Corporate taxation (double taxation)

Journalizing entries for issuing par-value stock, no-par stock, Learning Objective 2 Journalizing entries for issuing par-value stock, no-par stock, and no-par with stated value stock.

Learning Unit 18-2 (Stockholders’ Equity) Paid-in Capital Retained Earnings 9

Learning Unit 18-2 (Stockholders’ Equity) Capital stock Authorized capital stock Issued capital stock Outstanding capital stock

Learning Unit 18-2 (Stockholders’ Equity) Capital stock is the amount paid to the business. Par value is the legal capital assigned to each share. Usually it is the amount paid to the corporation for the initial issuances of stock. Retained earnings is net income less net loss less dividends.

Learning Unit 18-2 (Stockholders’ Equity) What are some characteristics of common stock? Voting rights Profit sharing Selling the stock Preemptive right (right to maintain ownership ratio)

Learning Unit 18-2 (Stockholders’ Equity) What are some characteristics of preferred stock? First claim to dividend distribution Usually have no voting rights

Learning Unit 18-2 (Stockholders’ Equity) Dividends are paid to stockholders as their share of the corporation’s profit. Common dividends Preferred dividends

Learning Unit 18-2 (Stockholders’ Equity) Cumulative preferred stockholders have a right to receive a dividend each year. Amounts not declared and paid accumulate each year. These are paid before any current year dividends (dividends in arrears).

Learning Unit 18-3 (Recording Transactions) Roger Company sells 200 shares of a $10 par value common stock at $10 per share. Accounts Affected Category Rules Cash Asset Dr. 2,000 Common Stock SE Cr. 2,000

Learning Unit 18-3 (Recording Transactions) Assume R.C. sells 300 shares of $50 par value preferred stock at $50 on March 18, 20xx. What is the journal entry? March 18, 20xx Cash 15,000 Preferred Stock 15,000

Learning Unit 18-3 (Recording Transactions) Roger Co. sells 50 shares of $10 par value common stock at $15 on June 8, 20xx. June 8, 20xx Cash 750 Common Stock 500 Paid-in Capital in Excess of Par Value – Common 250 12

Learning Unit 18-3 (Recording Transactions) Moss Co. sells 300 shares of a no-par common stock for $20 per share. Accounts Affected Category Rules Cash Asset Dr. 6,000 Common Stock SE Cr. 6,000

Calculating dividends on preferred and common stock. Learning Objective 3 Calculating dividends on preferred and common stock.

Learning Unit 18-3 (Recording Transactions) A $150,000 dividend is declared. Preferred stock is 6 % and fully participating. Preferred stock: 1,000 shares, $200 par. Common stock: 6,000 shares, $100 par.

Learning Unit 18-3 (Recording Transactions) Preferred dividend: 1,000 shares × $200 × .06 = $12,000 Common dividend: 6,000 shares × $100 × .06 = $36,000 How is the remaining $102,000 allocated?

Learning Unit 18-3 (Recording Transactions) Preferred stock: $200,000 ÷ $800,000 × $102,000 = $25,500 Common stock: $600,000 ÷ $800,000 × $102,000 = $76,500

Recording capital stock transactions under a stock Learning Objective 4 Recording capital stock transactions under a stock subscription plan.

Learning Unit 18-4 (Recording Transactions) Common Stock Subscribed Subscriptions Receivable – Common Stock 15

Learning Unit 18-4 (Recording Transactions) When stock is fully paid, it is issued. The par value is then transferred to common stock. Assume that Krump Corporation received subscriptions for 1,000 shares of $100 par-value common stock at $160 per share. What is the entry?

Learning Unit 18-4 (Recording Transactions) Subscriptions Receivable – Common Stock 160,000 Common Stock Subscribed 100,000 Paid-in Capital in Excess of Par 60,000 Received stock subscriptions 13

Learning Unit 18-4 (Recording Transactions) Stockholders' Equity Source-of-capital approach Legal capital approach 16

End of Chapter 18