1 1. 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: Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 4. 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.

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. Objective 1 Describe the nature of the corporate form of organization. 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.

3 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 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.

4 Employees Stockholders Officers Board of Directors 13-1 Exhibit 1 Organizational Structure of a Corporation

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.  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.

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.

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.

The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital. Objective 2 Describe the two main sources of stockholders’ equity. 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 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. A debit balance in Retained Earnings is called a deficit. Such a balance results from accumulated net losses.

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. 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. 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. Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. Objective 3

11 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 Two Primary Classes of Paid-In Capital 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.

E.g. 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,

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,

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 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.

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

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

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 Objective 4 Journalize the entries for cash dividends and stock dividends.

18 Dec.1Cash Dividends Declared cash dividend. Cash Dividends Payable Heber Corporation records the $42,500 liability on the declaration date 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

19 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

20 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

21 A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend. Stock Dividends 13-4 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.

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:

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:

24 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 Objective 5 Journalize the entries for treasury stock transactions.

25 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

26 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

27 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

Objective 6 Describe and illustrate the reporting of stockholders’ equity. Stockholders’ Equity Section of a Balance Sheet

29 Example Exercise Using the following accounts and balances, prepare the Stockholders’ Equity section of the balance sheet. Forty thousand shares of common stock are authorized and 5,000 shares have been reacquired. Common Stock, $50 par$1,500,000 Paid-in Capital in Excess of Par160,000 Paid-in Capital from Sale of Treasury Stock44,000 Retained Earnings4,395,000 Treasury Stock120,000

30 Follow My Example Stockholders’ Equity Paid-in capital: Common stock, $50 par (40,000 shares authorized, 30,000 shares issued)$1,500,000 Excess of issue price over par 160,000$1,660,000 From sale of treasury stock 44,000 Total paid-in capital$1,704,000 Retained earnings 4,395,000 Total$6,099,000 Deduct treasury stock (5,000 shares at cost) 120,000 Total stockholders’ equity$5,979,000

31 Retained Earnings Statement 13-6

Statement of Stockholders’ Equity 7

33 Example Exercise Dry Creek Camera Inc. reported the following results for the year ending March 31, 2008: Retained earnings, April 1, 2007$3,338,500 Net income461,500 Cash dividends declared80,000 Stock dividends declared120,000 Prepare a retained earnings statement for the fiscal year ended March 31, 2008.

34 For Practice: PE 13-6A, PE 13-6B Follow My Example DRY CREEK CAMERAS INC. RETAINED EARNINGS STATEMENT For the Year Ended March 31, 2008 Retained earnings, April 1, 2007$3,338,500 Net income$461,500 Less dividends declared 200,000 Increase in retained earnings 261,500 Retained earnings, March 31, 2008$3,600,000

35 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 Objective 7 Describe the effect of stock splits on corporate financial statements.

36 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 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. It is not recorded by a journal entry