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

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 Describe the nature of the corporate form of organization. Objective

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 and board of Commissioners. 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 Stockholders Board of CommissionersBoard of Directors Officers Employees Organizational Structure of a Corporation in Indonesia 13-1

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 (in Indonesia, troughs a board of commissioners).  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 13 First step, the founders need to check if their proposed name of the company has not been used by other. Second step, All founders need to sign the Deed of Establishment before a public notary. Third step, the public notary then will file application of establishment with the Minister of Law and Human Rights. This process can be done on-line, but only public notary have access to the web site. Fourth step, such establishment and ratification will then be published in the Supplement to State Gazette of the Republic of Indonesia. Forming a Corporation In Indonesia 13-1

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

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 Rp8,500,000 on January 5 is shown below: Jan. 5Organizational Expense Cash Paid costs of organizing the corporation.

Click to edit Master title style 16 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 stockRp330,000,000 Retained earnings 80,000,000 Total stockholders’ equity Rp410,000,000 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 21 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 25 Authorized 13-3 Number of Shares Authorized, Issued, and Outstanding IssuedOutstanding Issued Outstanding

Click to edit Master title style 26 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 27 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 Rp4,000 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 Rp20,000,000 Rp9,000,000 Rp62,000,000 Amount retained 10,000,000 6,000,000 40,000,000 Amount distributed Rp10,000,000 Rp3,000,000 Rp22,000,

Click to edit Master title style 29 Dividends to Common and Preferred Stock 13-3

Click to edit Master title style 30 Example Exercise PT Cahaya Sakti has stock 20,000 shares of 1% preferred stock of Rp100,000 par and 100,000 shares of Rp50,000 par common stock. The following amounts were distributed as dividends: Year 1:Rp10,000,000 Year 2:25,000,000 Year 3:80,000,000 Determine the dividends per share for preferred and common stock for each year.

Click to edit Master title style 31 For Practice: PE 13-1A, PE 13-1B Follow My Example Dividends per share: Preferred Rp500 Rp1,000 Rp1,000 Common stockNone Rp500Rp600 Year 1 Year 2 Year 3 Amount distributed Rp10,000,000 Rp25,000,000 Rp80,000,000 Preferred dividend (20,000 shares) 10,000,000 20,000,000 20,000,000 Common dividend (100,000 shares)Rp 0 Rp 5,000,000 Rp60,000,000

Click to edit Master title style A corporation is authorized to issue 10,000 shares of preferred stock, Rp100,000 par, and 100,000 shares of common stock, Rp20,000 par. One-half of each class of authorized shares is issued at par for cash. Issuing Stock Cash Issued preferred stock and common stock at par for cash. Preferred Stock Common Stock

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 PT Cahaya Cemerlang issues 2,000 shares of Rp50,000 par preferred stock for cash at Rp55,000. Cash Issued Rp50,000 par preferred stock at Rp55,000. 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 Rp10,000 par common that has a current market value of Rp12,000 in exchange for the land. Land Issued Rp10,000 par common stock valued at Rp12,000 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 Rp40,000 a share. Cash Issued 10,000 shares of no- par common stock at Rp40,000. Common Stock No-Par Stock

Click to edit Master title style 37 At a later date, the corporation issues 1,000 additional shares at Rp36,000. Cash Issued 1,000 shares of no-par common stock at Rp36,000. 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 39 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 Rp40,000. Stated value, Rp25,000. 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 Rp36,000 (stated value, Rp25,000).

Click to edit Master title style 41 Example Exercise On March 6, Limerick Corporation issued for cash 15,000 shares of no-par common stock at Rp30,000. On April 13, Limerick issued at par 1,000 shares of 4%, Rp40,000 par preferred stock for cash. On May 19, Limerick issued for cash 15,000 shares of 4%, Rp40,000 par preferred stock at Rp42,000. Journalize the entries to record the March 6, April 13, and May 19 transactions.

Click to edit Master title style 42 For Practice: PE 13-2A, PE 13-2B Follow My Example Mar.6Cash450,000,000 Common Stock450,000,000 (15,000 shares x Rp30,000) Apr.13Cash40,000,000 Preferred Stock 40,000,000 (1,000 shares x Rp40,000) May19Cash630,000,000 Preferred Stock600,000,000 Paid-in Capital in Excess of Par 30,000,000 (15,000 shares x Rp42,000)

Click to edit Master title style 43 Journalize the entries for cash dividends and stock dividends. Objective

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 45 First is the date of declaration. Assume that on December 1, PT Herlambang declares a Rp42,500,000 dividend (Rp12,500,000 to the 5,000 preferred stockholders and Rp30,000,000 to the 100,000 common stockholders) Three Important Dividend Dates

Click to edit Master title style 46 Dec.1Cash Dividends Declared cash dividend. Cash Dividends Payable PT Herlambang records the Rp42,500,000 liability on the declaration date. 13-4

Click to edit Master title style 47 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 48 The third important date is the date of payment. On January 2, PT Herlambang issues dividend checks. Three Important Dividend Dates Jan. 2Cash Dividends Payable Paid cash dividend. Cash

Click to edit Master title style 49 Example Exercise The important dates in connection with a cash dividend of Rp75,000,000 on a corporation’s common stock are February 26, March 30, and April 2. Journalize the entries required on each date. Follow My Example 13-3 Feb. 26Cash Dividends75,000,000 Cash Dividends Payable75,000,000 Mar.30No entry required. Apr. 2Cash Dividends Payable75,000,000 Cash75,000,000 For Practice: PE 13-3A, PE 13-3B

Click to edit Master title style 50 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 51 On December 15, the board of directors of PT Herlambang 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 Rp31,000 a share. 13-4

Click to edit Master title style Dec. 15 Stock Dividend (100,000 x Rp31,000 market)3, Declared 5% (100,000 share) stock dividend on Rp20,000 par common stock with a market value of Rp31,000 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 54 Example Exercise Vienna Highlights Corporation has 150,000 shares of Rp100,000 par common stock outstanding. On June 14, Vienna Highlights declared a 4% stock dividend to be issued August 15 to stockholders of record on July 1. The market price of the stock was Rp110,000 a share on June 14. Journalize the entries required on June 14, July 1, and August

Click to edit Master title style 55 For Practice: PE 13-4A, PE 13-4B Follow My Example June 14 Stock Dividends (150,000 x 4% x Rp110,000) 660,000,000 Stock Dividends Distributable (6,000 x Rp100,000)600,000,000 Paid-in Capital in Excess of Par— Common Stock (Rp660,000,000 – Rp600,000,000) 60,000,000 July1No entry required. Aug.15Stock Dividend Distributable 600,000,000 Common Stock 600,000,000

Click to edit Master title style 56 Journalize the entries for treasury stock transactions. Objective

Click to edit Master title style 57 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 58 On January 5, a firm purchased 1,000 shares of treasury stock (common stock, Rp25,000 par) at Rp45,000 per share. The cost method for accounting for treasury stock is used. Treasury Stock Purchased 1,000 shares of treasury stock at Rp45,000. Cash

Click to edit Master title style 59 Later, 200 shares of treasury stock were sold for Rp60,000 per share. Cash Sold 200 of treasury stock at Rp60,000. 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 60 Sold 200 shares of treasury stock at Rp40,000 per share. Cash Sold 200 of treasury stock at Rp40,000. Treasury Stock Paid-in Capital from Sale of Treasury Stock

Click to edit Master title style 61 Example Exercise On May 3, PT Budiraharja reacquired 3,200 shares of its common stock at Rp42,000 per share. On July 22, PT Budiraharja sold 2,000 of the reacquired shares at Rp47,000 per share. On August 30, PT Budiraharja sold the remaining shares at Rp40,000 per share. Journalize the transactions of May 3, July 22, and August

Click to edit Master title style 62 For Practice: PE 13-5A, PE 13-5B Follow My Example May3Treasury Stock (3,200 x Rp42,000)134,400,000 Cash134,400,000 July22Cash (2,000 x Rp47,000)94,000,000 Treasury Stock (2,000 x Rp42,000) 84,000,000 Paid-in Capital from Sale of Treasury Stock [2,000 x (Rp47,000 – Rp42,000)] 10,000,000 Aug.30Cash (1,200 x Rp40,000)48,000,000 Paid-in Capital from Sale of Treasury Stock [1,200 x (Rp42,000 – Rp40,000)]2,400,000 Treasury Stock (1,200 x Rp42,000) 50,400,000

Click to edit Master title style 63 Describe and illustrate the reporting of stockholders’ equity. Objective

Click to edit Master title style 64 Stockholders’ Equity Section of a Balance Sheet 13-6

Click to edit Master title style 65 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. 65 Common Stock, Rp50,000 par Rp1,500,000,000 Paid-in Capital in Excess of Par 160,000,000 Paid-in Capital from Sale of Treasury Stock 44,000,000 Retained Earnings 4,395,000,000 Treasury Stock 120,000,000

Click to edit Master title style 66 For Practice: PE 13-6A, PE 13-6B Follow My Example Stockholders’ Equity Paid-in capital: Common stock, Rp50,000 par (40,000 shares authorized, 30,000 shares issued) Rp1,500,000,000 Excess of issue price over par 160,000,000 Rp1,660,000,000 From sale of treasury stock 44,000,000 Total paid-in capital Rp1,704,000,000 Retained earnings 4,395,000,000 Total Rp6,099,000,000 Deduct treasury stock (5,000 shares at cost) 120,000,000 Total stockholders’ equity Rp5,979,000,000

Click to edit Master title style 67 Retained Earnings Statement 13-6

Click to edit Master title style 68 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 69 Statement of Stockholders’ Equity 13-6

Click to edit Master title style 70 Example Exercise PT Kamera Jakarta. reported the following results for the year ending March 31, 2008: 70 Retained earnings, April 1, 2007 Rp3,338,500,000 Net income 461,500,000 Cash dividends declared 80,000,000 Stock dividends declared 120,000,000 Prepare a retained earnings statement for the fiscal year ended March 31, 2008.

Click to edit Master title style 71 For Practice: PE 13-6A, PE 13-6B Follow My Example PT KAMERA JAKARTA RETAINED EARNINGS STATEMENT For the Year Ended March 31, 2008 Retained earnings, April 1, 2007 Rp3,338,500,000 Net income Rp461,500,000 Less dividends declared 200,000,000 Increase in retained earnings 261,500,000 Retained earnings, March 31, 2008 Rp3,600,000,000

Click to edit Master title style 72 Describe the effect of stock splits on corporate financial statements. Objective

Click to edit Master title style 73 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 PT Rojali has 10,000 shares of Rp100,000 par common stock outstanding with a current market price of Rp150,000 per share. The board of directors declares a 5-for-1 stock split.

Click to edit Master title style 75 BEFORE STOCK SPLIT 4 shares, Rp100,000 par $400 total par value 20 shares, Rp20,000 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.