19–1 McQuaig Bille 1 College Accounting 10 th Edition McQuaig Bille Nobles © 2011 Cengage Learning PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University Chapter 19 Corporate Organization and Capital Stock

19–2 Definition of a Corporation  In 1818, Chief Justice Marshall defined a corporation as “an artificial being, invisible, intangible, and existing only in contemplation of the law.”  A corporation derives its existence from its charter, or written permit.  A corporation is a separate legal entity, having a continuous existence apart from its owners.

19–3 Advantages and Disadvantages of the Corporate Form

19–4 S Corporations  An S corporation is a corporation that elects with the IRS to be treated as a pass-through entity for tax purposes. An S corporation does not pay tax at the entity level. The shareholders pay the tax on any profit. An S corporation can have no more than 100 shareholders.

19–5 Limited Liability Companies  A limited liability corporation (LLC) can elect to be treated as a partnership for income tax purposes. This structure allows the corporate advantage of limited liability. The limited liability corporation allows more operating flexibility. The limited liability framework is popular with closely held and family-owned businesses.

19–6 Formation of a Corporation When a corporation incorporates a document called the articles of incorporation is prepared. It includes the following information:  Name and legal address of the corporation  Nature of the business to be conducted  Amount and description of the capital stock to be issued  Name and addresses of the first governing body of the corporation

19–7 Formation of a Corporation  The articles of incorporation must be accompanied by a charter fee, which may be based on the dollar amount of maximum stock investment, or authorized capital.  The charter and the bylaws provide the basic rules for conducting the corporation’s affairs.  The corporation issues capital stock, or shares of ownership, to buyers of stock.  The shares of stocks are in the form of certificates.  A corporation whose ownership is confined to a small group of stockholders is called a closely held corporation.  A corporation whose ownership is widely distributed through a stock exchange or through over-the-counter markets to a large number of stockholders is called a publicly traded corporation.

19–8 Organization Costs Fees paid to organize the company, such as fees paid to the state, attorney’s fees, promotional costs, travel outlays, and cost of printing are organization costs.

19–9 Stock Certificate Book  One necessary element of organization costs is the printing of stock certificates. On each blank certificate is written the name of the owner, the number of shares issued, and the date of issuance.  The law requires large corporations whose stocks are listed on major stock exchanges to have independent registrars and transfer agents maintain their records of stock ownership.

19–10 Structure of a Corporation  The stockholders own the corporation.  Stockholders delegate authority to the board of directors, which manages the corporation’s affairs.  The board of directors, in turn, delegates authority to the management team, which is responsible for the day-to-day operations of the business.  Dividends are the share of the corporation’s earnings distributed to stockholders that can be paid in cash or with additional shares of stock.  When a corporation issues some new stock, each original stockholder may have the right to subscribe to additional shares in proportion to her or his present holding. This feature isknown as the preemptive right.

19–11 Return on investment represents the earning power of the owner’s investment in the business. Net Income for the Year Average Capital Return on Investment = Beginning Capital + Ending Capital 2 Average Capital = Return on Investment (Yield)

19–12 Return on Investment = Return on Investment (Yield) $117,000 = 22.4% Winter Ski Corporation had net income in 2011 of $117, Beginning balance of owner’s Capital account$515,000$530,000 Ending balance of owner’s Capital account530,000510, Average Capital = $515,000 + $530,000 = $522,500

19–13 Return on Investment (Yield) Winter Ski Corporation had net income in 2010 of $132, Beginning balance of owner’s Capital account$515,000$530,000 Ending balance of owner’s Capital account530,000510,000 Beginning Capital + Ending Capital 2 Average Capital = 2010 $530,000 + $510,000 Average Capital = $520,000 Net Income for the Year Average Capital Return on Investment = $132,000 $520,000 = 25.4%

19–14 Stockholders’ Equity  The owners’ equity in a corporation is called stockholders’ equity, or capital.  Stockholders’ equity represents the excess of assets over liabilities.  The Retained Earnings account is used to record earnings reinvested into the business.

19–15 Capital Stock  Capital stock refers to shares of ownership in a corporation.  Authorized capital stock is the maximum number of shares designated by the charter.  Issued stock refers to the shares apportioned out to the stockholders.  Outstanding stock is the stock that is actually in the hands of the stockholders.  Treasury stock is reacquired stock.

19–16 Treasury Stock 1.Reissue shares to officers and employees under bonus and stock compensation plans. A corporation may acquire treasury stock to: 2.Rid the company of disgruntled investors. 3.Increase trading of the company’s stock in the securities market in the hopes of enhancing its market value.

19–17 Classes of Capital Stock  The two main types of stock are common and preferred.  Par-value stock is stock with a value printed on the stock certificate.  No-par-value stock has no value printed on the stock certificate.  When a corporation issues only one type of stock, it is called common stock.  Preferred stock has (1) a preference to dividends and (2) preference in case of liquidation.

19–18 (continued) Classes of Capital Stock

19–19 Classes of Capital Stock

19–20 Cumulative and Noncumulative Preferred Stock  When a corporation does not pay dividends on its preferred stock, the dividend is said to be passed.  Dividends on cumulative preferred stock may accrue to stockholders. The corporation has to pay these dividends in full before it can pay any dividends to common stockholders.  For stockholders who own noncumulative preferred stock, dividends do not accumulate.  When dividends are passed, they are lost forever to the stockholders holding noncumulative preferred stock.

19–21 Participating and Nonparticipating Preferred Stock  Some preferred stock provide for the possibility of dividends in excess of the established amount; this kind of preferred stock is called participating preferred stock.  Dividends on nonparticipating preferred stock are limited to the regular rate (an established percentage of the par value).

Issuing Stock at Par On August 1, Tico Cruise Corporation issued 2,000 shares of $100-par preferred 8 percent stock at par and 10,000 shares of $50-par common stock at par.

Issuing Stock at Par for Assets and Organization Expense On August 1, Tico Cruise Corporation received equipment (fair market value, $11,000), a building (fair market value, $140,000), and land (fair market value, $120,000) in exchange for 5,420 shares of common stock. When a corporation accepts an asset other than cash, the accountant records the asset at its fair market value.

19–24 Issuing Stock at Par for Assets and Organization Expense On August 1, Tico Cruise Corporation issued 100 shares of common stock to its organizers when the current market value of the stock was $50.

Issuing Stock at a Premium  The market price of the stock of a corporation is usually influenced by the following factors: 1.The earnings record, financial condition, and dividend record of the corporation 2.The potential for growth in earnings of the corporation 3.The supply of and demand for money for investment purposes in the money market as a whole 4.General business conditions and prospects for the future  When a corporation issues stock at a price above par value, the stock is said to be issued at a premium.  The premium may exist because the corporation has performed successfully in the past and has good prospects for growth in earnings.  When a corporation sells its stock at a price below par value, the stock is said to be issued at a discount.

19–26 Premium on Stock Tico Cruise Corporation issued 900 shares of $100 par cumulative preferred 8 percent stock at $103 on November 1. Paid-in Capital in Excess of Par is used for the difference between the amount received and the par value.

19–27 Premium on Stock

Stockholders’ Equity Section of a Balance Sheet Stockholders’ equity is divided into Paid-in Capital and Retained Earnings. Notice the listing includes the par value, the shares authorized, and the shares issued.

19–29 No-Par Value Stock  Preferred stock generally has a par value.  If common stock does not have a par value, it is referred to as no-par value stock.  No-par value stock has the advantage of allowing greater price flexibility for the issuing corporation.  No-par value stock also has the advantage that it prevents misconceptions on the part of inexperienced stockholders.

19–30 Stated Value and No-Par Value Stock  When all of a company’s stock is of the par-value type, the par value of the shares represents the company’s legal capital, which stockholders cannot withdraw.  The part of the amount the corporation receives from its no-par value stock that is exempt from withdrawal by the stockholders is the stated value.

19–31 Established Amount of Stated Value The board of directors of Travel and Adventure Corporation designated a stated value of $55 per share for its common stock. On June 20, Travel and Adventure Corporation issued 1,400 shares at $66 per share, receiving cash.

19–32 Established Amount of Stated Value On September 10, Travel and Adventure Corporation issues an additional 1,000 shares at $60 per share, receiving cash.

19–33 Established Amount of Stated Value

19–34 Subscriptions and Stock Issuance  A corporation often sells its stock directly to investors on a subscription contract (installment) basis.  This type of sale is recorded as a capital stock subscription.  When investors want subscriptions to both common and preferred stock, the accountant uses separate accounts for each.

19–35 Subscription Transaction: Par-Value Stock Alaskan Eco-Adventures, Inc., a newly organized company, has the following transactions involving its own stock. June 15Received subscription to 6,000 shares of common stock ($100 par value) from various subscribers at $104 per share, with a down payment of 40 percent of the subscription price.

19–36

19–37 July 1Received 30 percent of the subscription price from all subscribers (6,000 shares). Subscription Transaction: Par-Value Stock

19–38 Subscription Transaction: Par-Value Stock July 15Received 30 percent of the subscription price from subscribers of 500 shares, and issued 500 shares.

19–39 Subscription Transaction: Par-Value Stock A second entry is required for the issuance of the 500 shares of stock.

19–40 Subscription Transaction: Par-Value Stock  The firm does not issue stock until the investor has paid for it in full.  Common Stock Subscribed represents the total par value or stated value of the shares subscribed.  Common Stock Subscribed is a temporary account to handled subscribed shares that have not yet been paid for in full.  In the ledger account for stock issued and subscribed, also include the number of shares in the Item column.

Subscription Transaction: Par-Value Stock

19–42 Controlling Accounts and Subsidiary Ledgers

19–43 Illustration of a Corporate Balance Sheet  Retained Earnings is added separately to Total Paid- in Capital because it has a credit balance.  When Retained Earnings has a credit balance (its normal balance), it represents a surplus.  When Retained Earnings has a debit balance, it is called a deficit.