Click to edit Master title style Corporations: Organization, Stock Transactions, and Dividends

Click to edit Master title style Characteristics of a Corporation A corporation is a legal entity, distinct and separate from the individuals who create and operate it. As a legal entity, a corporation may acquire, own, and dispose of property in its own name.

Click to edit Master title style The stockholders or shareholders who own the stock own the corporation. Corporations whose shares of stock are traded in public markets are called public corporations.

Click to edit Master title style Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called nonpublic or private corporations. The stockholders of all corporation have limited liability. 13-1

Click to edit Master title style The stockholders control a corporation by electing a board of directors. The board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers. 13-1

Click to edit Master title style Employees Stockholders Officers Board of Directors 13-1 Exhibit 1 Organizational Structure of a Corporation

Click to edit Master title style Advantages of the Corporate Form  A corporation exists separately from its owners.  A corporation’s life is separate from its owners; therefore, it exists indefinitely.  The corporate form is suited for raising large amounts of money from stockholders. (Continued)

Click to edit Master title style Advantages of the Corporate Form  A corporation sells shares of ownership, called stock. Stockholders can transfer their shares of stock to other stockholders.  A corporation’s creditors usually may not go beyond the assets of the corporation to satisfy their claims. (Concluded)

Click to edit Master title style Disadvantages of the Corporate Form  Stockholders control management through a board of directors.  As a separate legal entity, the corporation is subject to taxation. Thus, net income distributed as dividends will be taxed at both the corporate and individual levels.  Corporations must satisfy many regulatory requirements.

Click to edit Master title style Organization Structure of a Corporation 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: Jan. 5Organizational Expense Cash Paid costs of organizing the corporation.

Click to edit Master title style 11 Describe the two main sources of stockholders’ equity. Objective

Click to edit Master title style The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital.

Click to edit Master title style The two sources of capital found in the Stockholders’ Equity section of a balance sheet are paid-in capital or contributed capital (capital contributed to the corporation by stockholders and others) and retained earnings (net income retained in the business). Stockholders’ Equity

Click to edit Master title style 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.

Click to edit Master title style A debit balance in Retained Earnings is called a deficit. Such a balance results from accumulated net losses.

Click to edit Master title style 16 Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. Objective

Click to edit Master title style 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.

Click to edit Master title style 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.

Click to edit Master title style 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.

Click to edit Master title style Authorized 13-3 Number of Shares Authorized, Issued, and Outstanding IssuedOutstanding

Click to edit Master title style 21 1.The right to vote in matters concerning the corporation. 2.The right to share in distributions of earnings. 3.The right to share in assets on liquidation Major Rights That Accompany Ownership of a Share of Stock

Click to edit Master title style 22 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 Two Primary Classes of Paid-In Capital

Click to edit Master title style A corporation has 1,000 shares of $4 preferred stock and 4,000 shares of common stock outstanding. The net income, amount of earnings retained, and the amount of earnings distributed are as follows: Net income$20,000$9,000$62,000 Amount retained 10,000 6,000 40,000 Amount distributed$10,000$3,000$22,

Click to edit Master title style Dividends to Common and Preferred Stock

Click to edit Master title style 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. Issuing Stock Cash1, Issued preferred stock and common stock at par for cash. Preferred Stock Common Stock1,

Click to edit Master title style When a stock is issued for a price that is more than its par, the stock has sold at a premium. When stock is issued for a price that is less than its par, the stock has sold at a discount.

Click to edit Master title style Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. Cash Issued $50 par preferred stock at $55. Preferred Stock Paid-in Capital in Excess of Par—Preferred Stock Premium on Stock

Click to edit Master title style 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. Land Issued $10 par common stock valued at $12 per share, for land. Common Stock Paid-in Capital in Excess of Par

Click to edit Master title style A corporation issues 10,000 shares of no- par common stock at $40 a share. Cash Issued 10,000 shares of no- par common stock at $40. Common Stock No-Par Stock

Click to edit Master title style At a later date, the corporation issues 1,000 additional shares at $36. Cash Issued 1,000 shares of no-par common stock at $36. Common Stock

Click to edit Master title style 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 value per share.

Click to edit Master title style Using the same data as we used for par the transaction is recorded as follows: 13-3 Cash Issued 10,000 shares of no- par common at $40. Stated value, $25. Common Stock Stated Value Paid-in Capital in Excess of Stated Value

Click to edit Master title style Cash Issued 1,000 shares of no- par common at $36. Stated value, $25. Common Stock Paid-in Capital in Excess of Stated Value The corporation issued 1,000 shares of no-par common stock at $36 (stated value, $25).

Click to edit Master title style 34 Journalize the entries for cash dividends and stock dividends. Objective

Click to edit Master title style 35 Today’s Stock Market Report Knives are up sharply Dairy cows were steered into a bull market Pencils lost a point Hiking gear is trailing

Click to edit Master title style 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. 1.Sufficient retained earnings 2.Sufficient cash 3.Formal action by the board of directors

Click to edit Master title style 37 First is the date of declaration. Assume that on December 1, Hiber Corporation declares a $42,500 dividend ($12,500 to the 5,000 preferred stockholders and $30,000 to the 100,000 common stockholders Three Important Dividend Dates

Click to edit Master title style Dec.1Cash Dividends Declared cash dividend. Cash Dividends Payable Heber Corporation records the $42,500 liability on the declaration date. 13-4

Click to edit Master title style 39 The second important date is the date of record. For Hiber Corporation this would be December 10. No entry is required since this date merely determines which stockholders will receive the dividend. Three Important Dividend Dates 13-4

Click to edit Master title style The third important date is the date of payment. On January 2, Hiber issues dividend checks. Three Important Dividend Dates Jan. 2Cash Dividends Payable Paid cash dividend. Cash

Click to edit Master title style 41 A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend. Stock Dividends 13-4

Click to edit Master title style 42 On December 15, the board of directors of Hendrix Corporation declares a 5% stock dividend of 100,000 shares (2,000,000 shares x 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. 13-4

Click to edit Master title style Dec. 15 Stock Dividend (100,000 x $31 market)3, Declared 5% (100,000 share) stock dividend on $20 par common stock with a market value of $31 per share. Stock Dividend Distributable 2, Paid-in Capital in Excess of Par—Common Stock1, The entry to record the declaration of the 5 percent stock dividend is as follows:

Click to edit Master title style Jan.10Stock Dividends Distributable 2, Issued stock for the stock dividend. Common Stock2, On January 10, the number of shares out- standing is increased by 100,000. The following entry records the issue of the stock:

Click to edit Master title style 45 Journalize the entries for treasury stock transactions. Objective

Click to edit Master title style 46 Today’s Stock Report Analysts reported the cereal market popped after a cold snap causing Kellogg stock to crackle Kimberly-Clark reported that while Huggies dropped, Cottonelle cleaned up the market and Scott tissue touched a new bottom Meanwhile, Coca-Cola fizzled While Pepsi went flat

Click to edit Master title style 47 Occasionally, a corporation buys back its own stock to provide shares for resale to employees, for reissuing as a bonus to employees, or for supporting the market price of the stock. This stock is referred to as treasury stock. Treasury Stock Transactions 13-5

Click to edit Master title style 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. Treasury Stock Purchased 1,000 shares of treasury stock at $45. Cash

Click to edit Master title style Later, 200 shares of treasury stock were sold for $60 per share. Cash Sold 200 of treasury stock at $60. Treasury Stock* Paid-in Capital from Sale of Treasury Stock *The amount debited to Treasury Stock per share when purchased is the amount per share that must be credited to that account when sold.

Click to edit Master title style Sold 200 shares of treasury stock at $40 per share. Cash Sold 200 of treasury stock at $40. Treasury Stock Paid-in Capital from Sale of Treasury Stock

Click to edit Master title style 51 Describe and illustrate the reporting of stockholders’ equity. Objective

Click to edit Master title style 52 Today’s Stock Market Report The price of Helium is up Feathers are down The paper industry is stationary Fluorescent tubing was dimmed today with light trading

Click to edit Master title style Stockholders’ Equity Section of a Balance Sheet

Click to edit Master title style Retained Earnings Statement 13-6

Click to edit Master title style 55 Restrictions 13-6 The retained earnings available for use as dividends may be limited by the actions of a corporation’s board of directors. These amounts, called restrictions or appropriations, remain part of the retained earnings. However, they must be disclosed, usually in the notes to the financial statements.

Click to edit Master title style Statement of Stockholders’ Equity 7

Click to edit Master title style 57 Describe the effect of stock splits on corporate financial statements. Objective

Click to edit Master title style 58 Today’s Stock Market Report Elevators rose while escalators continued their slow decline Weights were up in heavy trading Light switches were off Mining industry hit rock bottom

Click to edit Master title style 59 A corporation sometimes reduces the par or stated value of their common stock and issues a proportionate number of additional shares. This process is called a stock split. Stock Splits 13-7

Click to edit Master title style 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.

Click to edit Master title style BEFORE STOCK SPLIT 4 shares, $100 par $400 total par value 20 shares, $20 par AFTER 5:1 STOCK SPLIT $400 total par value 13-7

Click to edit Master title style Since a stock split changes only the par or stated value and the number of shares outstanding, it is not recorded by a journal entry. The details of the stock split are normally disclosed in the notes to the financial statements.

Click to edit Master title style Describe the nature of the corporate form of organization. 2. Describe the two main sources of stockholders’ equity. 3. Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. After studying this chapter, you should be able to:

Click to edit Master title style Journalize the entries for cash dividends and stock dividends. 5. Journalize the entries for treasury stock transactions. 6. Describe and illustrate the reporting of stockholders’ equity. 7. Describe the effect of stock splits on corporate financial statements. After studying this chapter, you should be able to:

Click to edit Master title style 65 Describe the nature of the corporate form of organization. Objective

Click to edit Master title style 66 1.First step in forming a corporation is to file an application of incorporation with the state Forming a Corporation  Because state laws differ, corporations often organize in states with more favorable laws.  More than half of the largest companies are incorporated in Delaware (see Exhibit 3 in Slide 14). (Continued)

Click to edit Master title style Examples of Corporations and Their States of Incorporation 14

Click to edit Master title style 68 2.After the application is approved, the state grants a charter or articles of incorporation which formally create the corporation Management and the board of directors prepare bylaws which are operation rules and procedures. Forming a Corporation (Concluded)