Click to edit Master title style Corporations: Organization, Stock Transactions, and Dividends 13

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 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 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 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 15 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 16 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 Example Exercise Sandpiper Company has stock 20,000 shares of 1% preferred stock of $100 par and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1:$10,000 Year 2:25,000 Year 3:80,000 Determine the dividends per share for preferred and common stock for each year.

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 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 25 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 27 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 29 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 30 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 Stockholders’ Equity Section of a Balance Sheet

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

Click to edit Master title style 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

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.