CHAPTER TWENTY-TWO CORPORATIONS: ORGANIZATIONS AND CAPITAL STOCK

CORPORATIONS 4Sell more goods and services in total than sole proprietorships and partnerships combined éBut there are fewer businesses organized as corporations. 4Separate legal entity that exists separate from its owners éCorporation’s assets and liabilities are those of the business, not the owners. éCorporation can own property, enter into contracts and incur debt in its own name. It can sue and be sued.

CHARACTERISTICS LIMITED LIABILITY OF OWNERS Owners of a corporation generally have no personal liability for the debts of the corporation. Major advantage of corporations

CHARACTERISTICS TRANSFERABLE OWNERSHIP UNITS Owner’s equity in a corporation is called Capital Stock. Capital Stock is divided into shares that can be transferred from one person to another without the consent of the other owners and without disturbing the corporation’s normal activities.

CHARACTERISTICS EASE OF RAISING CAPITAL The limited liability and transferable ownership characteristics are attractive to investors. Therefore, a corporation generally can obtain capital by selling additional shares of stock.

CHARACTERISTICS NO MUTUAL AGENCY Unlike partnerships, in a corporation individual owner’s do not have the power to act as an agent of the business.

CHARACTERISTICS UNLIMITED LIFE The corporation’s charter states the life as either perpetual or renewable. Changes in ownership have no effect on the life of a corporation.

CHARACTERISTICS TAXATION OF EARNINGS Corporations must pay income taxes. In addition, the corporation’s owners pay personal income tax on the dividends they receive. This results in “Double taxation”. DISADVANTAGE

CHARACTERISTICS GOVERNMENT REGULATION Activities of the corporation are regulated by federal, state and local laws. These laws may restrict the corporation’s ownership of real property, the purchase of its own stock and the retention of its earnings. DISADVANTAGE

CORPORATION é States have the power to create corporations. Incorporators file an application with the state. Once application is approved...Charter, also called Certificate of Incorporation, is prepared, including: - Name of the corporation - Location of the principal office - Purpose of the business -Description of the capital stock -Names and addresses of the incorporators

TERMINOLOGY 4BYLAWS - provide general guidelines for conducting the business 4STOCKHOLDERS - owners in a corporation 4STOCK CERTIFICATE - form that shows the name of stockholder and number of shares owned 4BOARD OF DIRECTORS - elected by stockholders, determine corporate policies 4OFFICERS - manage the corporation and are responsible to the board

CORPORATE ORGANIZATION OWNERS (Stockholders) Who elect the Who Appoint the OFFICERS (President, Vice President, Secretary, Treasurer) Who Manage the EMPLOYEES BOARD OF DIRECTORS

ORGANIZATION COSTS Incorporation Fees Attorney Fees Promotion Expenses EXAMPLES:

ORGANIZATION COSTS EXAMPLE: Neo Company charged $8,000 to Organization Costs (an Intangible Asset). These costs will be written off over a five-year period. Organization Costs 5 years It is the accepted practice to amortize Organization Costs over a 5 year period.

ORGANIZATION COSTS EXAMPLE: Neo Company charged $8,000 to Organization Costs (an Intangible Asset). These costs would be written off over a five-year period. Organization Costs 5 years $1,600 each year $8,000 5 years

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Amortization of Org. Costs1,600 Organization Costs Reported under “Other Expenses” on the Income Statement

EQUITY ACCOUNTS SOLE PROPRIETORSHIP Owner’s Equity Owner, CapitalOwner, Drawing Two Owner’s Equity accounts

EQUITY ACCOUNTS SOLE PROPRIETORSHIP Owner’s Equity Owner, CapitalOwner, Drawing All Equity transactions eventually affect the one capital account. 1. Investments 2. Net Income 2. Net Loss3. Drawing 4. Closing

EQUITY ACCOUNTS PARTNERSHIP Partners’ Equity Partner A, CapitalPartner A, Drawing 1. Investments 2. Net Income 2. Net Loss3. Drawing 4. Closing Partner B, Capital 1. Investments 2. Net Income 2. Net Loss 4. Closing Partner B, Drawing 3. Drawing 4. Closing Similar to sole proprietorship but multiple capital and drawing accounts

EQUITY ACCOUNTS CORPORATION Stockholders’ Equity Capital Stock Additional Paid-In-Capital 1. Investments Only records investments by owners

EQUITY ACCOUNTS CORPORATION Stockholders’ Equity Capital Stock Additional Paid-In-Capital 1. Investments Retained Earnings 1. Investments Separate account which records the earnings of the corporation 2. Net Income2. Net Loss

EQUITY ACCOUNTS CORPORATION Stockholders’ Equity Capital Stock Additional Paid-In-Capital 1. Investments Retained Earnings 1. Investments Corporations make a distinction between capital invested by the owners (Paid-In-Capital) and earnings retained in the business. 2. Net Income2. Net Loss

EQUITY ACCOUNTS CORPORATION Stockholders’ Equity Capital Stock Additional Paid-In-Capital 1. Investments Retained Earnings 1. Investments Dividends Drawings are now Dividends and are closed to Retained Earnings. 2. Net Income2. Net Loss 4. Closing 3. Dividends

CAPITAL STOCK 4AUTHORIZED STOCK - The total number of shares the corporate charter authorizes a corporation to issue 4ISSUED STOCK - Stock that has been sold and issued 4TREASURY STOCK - Stock that has been bought back 4OUTSTANDING STOCK - Number of shares in the hands of stockholders.

STOCK VALUES PAR VALUE Dollar amount per share Recorded in the Capital Stock account MARKET VALUE Amount for which the stock can be sold NO-PAR STOCK Stock that has no dollar amount Amount assigned by board of directors STATED VALUE

COMMON STOCK 4If corporation has only one type of stock…it’s called “Common Stock.” 4Gives its owner the right to: éVote at stockholder meetings éShare in earnings distributions éPurchase additional shares in proportion to the owner’s present holding if more shares are issued called the “Preemptive Right” éShare in the assets if the corporation liquidates

PREFERRED STOCK 4Type of stock that gives its owners certain rights and privileges superior to those of common stock: éfor example….right to receive dividends before common stock édividends are stated as a dollar amount or a % of par value 4Don’t have common stockholders’ rights éfor example... they don’t have the right to vote

DIVIDEND ALLOCATION EXAMPLE: Pref Company has 2,000 shares of $50 par, $4 preferred stock, and 2,000 shares of $10 par common stock outstanding. The amount available for dividends for the year is $14,000. Preferred StockCommon Stock $8,000 $4 dividend for each share of preferred stock (2000 shares)

DIVIDEND ALLOCATION EXAMPLE: Pref Company has 2,000 shares of $50 par, $4 preferred stock, and 2,000 shares of $10 par common stock outstanding. The amount available for dividends for the year is $14,000. Preferred StockCommon Stock $8,000 $14,000Available for dividends - 8,000For preferred stockholders $ 6,000 Leftover for the common shareholders $6,000

DIVIDEND ALLOCATION EXAMPLE: Pref Company has 2,000 shares of $50 par, $4 preferred stock, and 2,000 shares of $10 par common stock outstanding. The company declared no dividends in year 1 and $22,000 in year 2. Preferred StockCommon Stock Depends on the type of Preferred Stock… Cumulative or NonCumulative Should we go back and give the Preferred stockholders the dividend for Year 1?

DIVIDEND ALLOCATION EXAMPLE: Pref Company has 2,000 shares of $50 par, $4 preferred stock, and 2,000 shares of $10 par common stock outstanding. The company declared no dividends in year 1 and $22,000 in year 2. Preferred StockCommon Stock Cumulative Preferred Stock accumulates unpaid dividends from year to year. $8,000 Year 1 $8,000 Year 2

DIVIDEND ALLOCATION EXAMPLE: Pref Company has 2,000 shares of $50 par, $4 preferred stock, and 2,000 shares of $10 par common stock outstanding. The company declared no dividends in year 1 and $22,000 in year 2. Preferred StockCommon Stock Preferred receives both years’ dividends before Common Stock gets any dividends. $8,000 Year 1 $8,000 Year 2 $16,000 $6,000 $22,000-16,000

DIVIDEND ALLOCATION EXAMPLE: Pref Company has 2,000 shares of $50 par, $4 preferred stock, and 2,000 shares of $10 par common stock outstanding. The company declared no dividends in year 1 and $22,000 in year 2. Preferred StockCommon Stock NonCumulative Preferred Stock does not carry dividends from year to year. $8,000 Year 2 $14,000 $22,000-8,000

PARTICIPATING PREFERRED STOCK 4Gives owners the right to share with common stock owners in dividends in excess of a stated dividend rate éRare to find anymore 4NonParticipating limits the preferred stock owners to the stated dividend rate

CAPITAL STOCK TRANSACTIONS è Corporations issue capital stock in exchange for cash and noncash assets. é Issuance for cash is the most common transaction é Stock may be issued: at par at a premium, or at a discount Let’s look at some examples...

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Cash50,000 Common Stock Linc Corp. issues 10,000 shares of $5 par common stock at par for $50,000 cash. Issued common stock at par

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Cash60,000 Common Stock What if the stock had been issued for for $60,000 cash?

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Cash60,000 Common Stock # of shares issued x par value 10,000 shares x $5 par value 50,000

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Cash60,000 Common Stock Extra received above par value 50,000 Paid-in-Capital in Excess of Par--Common Stock10,000 Issued common stock at a premium

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Cash96,000 4,000 Preferred Stock Linc Corp. issues 2,000 shares of $50 par, 8% preferred stock for $96,000 cash. Issued preferred stock at Discount on Preferred Stock 100,000 a discount

DISCOUNTS 4Seldom used because: éfirms generally set very low par values épurchaser is liable to the corporation’s creditors for the difference between the par value and the amount paid éillegal in many states

STATED VALUE STOCK EXAMPLE: Stat Company issued 5,000 shares of no-par common stock with a stated value of $10 per share for $70,000 cash. Stock may have a stated value instead of a par value. Accounting for stated value is very similar to par value….only a few account title changes.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Cash70,000 Common Stock # shares x stated value per share 50,000

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Cash70,000 Common Stock50,000 Paid-in-Capital in Excess of Stated Value--Com. Stock20,000 Slight change in the title of the account

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Cash70,000 Common Stock Example: Noll Company issued 5,000 shares of no-par common stock for $70, ,000

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Cash70,000 Common Stock Common Stock is credited for entire amount received. A Paid-In-Capital in Excess account is not used. 70,000

STOCK ISSUED FOR NON- CASH ASSETS 4Guideline: éThe assets received are recorded at the fair market value of the assets or of the stock, whichever can be more clearly determined.

STOCK ISSUED FOR NON- CASH ASSETS Linc Corp. issues 5,000 shares of $5 par common stock for a truck. It is hard to determine the market value of the stock but the truck has a known market value of $30,000.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Truck30,000 Common Stock Truck is recorded at its Fair Market Value. Common Stock is recorded at par. Paid-in-Capital is credited for the difference. 25,000 Paid-in-Capital in Excess of Par--Common Stock5,000

STOCK SUBSCRIPTIONS 4An agreement in which a buyer (subscriber) contracts to buy shares of stock from a corporation at a specific price. éSubscriber generally agrees to pay the amount in full on a specified date or in installments. éStock is not issued until subscriber makes the full payment.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Stock Subscriptions Receivable60,000 Common Stock Subscribed Example: Linc Corp received subscriptions for 10,000 shares of its $5 par common stock for $60, ,000 Paid-in-Capital in Excess of Par--Common Stock10,000

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Stock Subscriptions Receivable60,000 Common Stock Subscribed Example: Partial Payment is received. 50,000 Paid-in-Capital in Excess of Par--Common Stock10,000 Cash Stock Subscriptions Receiv. 40,000

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Example: Final Payment is received. Cash Stock Subscriptions Receiv. 20,000

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Stock is issued. Cash Stock Subscriptions Receiv. 20,000 Common Stock Subscribed50,000 Common Stock50,000

TREASURY STOCK 4When a company buys back its own stock, it’s called “Treasury Stock.” 4When Treasury Stock is purchased: édebited for the amount paid regardless of par value éTreasury Stock account is a contra-stockholders’ equity account.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Common Treasury Stock18,000 Cash Example: Linc Corp purchases 3,000 shares of its $5 par common stock for $6 per share, a total of $18, ,000

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Common Treasury Stock18,000 Cash Example: Linc Corp sells 2,000 of the 3,000 treasury shares for $7 per share, a total of $14, ,000 Cash14,000 Common Treasury Stock

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Common Treasury Stock18,000 Cash 2,000 shares x $6 per share 18,000 Cash14,000 Common Treasury Stock12,000

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Common Treasury Stock18,000 Cash18,000 Cash14,000 Common Treasury Stock12,000 Paid-in-Capital from Sale of Treasury Stock2,000 Linc sells the remaining 1,000 treasury shares for $5.50 per share, a total of $5,500.

GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Cash Paid-in-Capital from Sale 5, Treasury Stock6,000 of Treasury Stock

REVIEW OF NEW ACCOUNTS ACCOUNT NAME: TYPE OF ACCOUNT: Common Stock & Preferred Stock STOCKHOLDERS’ EQUITY PURPOSE: Credited for par or stated value (if stock has one) If no-par…credited for amount received for stock issued BALANCE SHEET PRESENTATION: PAID-IN-CAPITAL section

REVIEW OF NEW ACCOUNTS ACCOUNT NAME: TYPE OF ACCOUNT: Paid-In-Capital in Excess of Par (or Stated Value) - Common & Preferred Stock STOCKHOLDERS’ EQUITY PURPOSE: Credited for amount by which issue price exceeds par or stated value (not used when issuing no-par stock) BALANCE SHEET PRESENTATION: ADDITIONAL PAID-IN-CAPITAL section

REVIEW OF NEW ACCOUNTS ACCOUNT NAME: TYPE OF ACCOUNT: Discount on Common & Preferred Stock STOCKHOLDERS’ EQUITY PURPOSE: Debited for amount by which par or stated value exceeds issue price BALANCE SHEET PRESENTATION: Deduction in the PAID-IN-CAPITAL section

REVIEW OF NEW ACCOUNTS ACCOUNT NAME: TYPE OF ACCOUNT: Common & Preferred Stock Subscription Receivable ASSET PURPOSE: BALANCE SHEET PRESENTATION: RECEIVABLES ARE ASSETS!!!

REVIEW OF NEW ACCOUNTS ACCOUNT NAME: TYPE OF ACCOUNT: Common & Preferred Stock Subscription Receivable ASSET PURPOSE: Debited for subscription price of stock BALANCE SHEET PRESENTATION: CURRENT ASSET section (usually)

REVIEW OF NEW ACCOUNTS ACCOUNT NAME: TYPE OF ACCOUNT: Common & Preferred Stock Subscribed STOCKHOLDERS’ EQUITY PURPOSE: BALANCE SHEET PRESENTATION: PAID-IN-CAPITAL section Credited for par or stated value (if stock has one) of stock subscribed. If no-par…credited for amount of stock subscription

REVIEW OF NEW ACCOUNTS ACCOUNT NAME: TYPE OF ACCOUNT: Paid-In-Capital from sales of Treasury Stock STOCKHOLDERS’ EQUITY PURPOSE: BALANCE SHEET PRESENTATION: ADDITIONAL PAID-IN-CAPITAL section Credited for excess of selling price over cost Debited for excess of cost over selling price

Stockholders’ Equity Paid-in-capital: Equity is separated by source: Paid-in-capital = amounts contributed by owners Retained Earnings = accumulated, undistributed earnings

Stockholders’ Equity Paid-in-capital: Preferred stock, 7%, $10 par (20,000 shares auth., 14,000 shares issued) Preferred stock subscribed (6,000 shares) $140,000 60,000$200,000 Preferred stock is listed first because of its preferred claim to dividends and assets.

Stockholders’ Equity Paid-in-capital: Preferred stock, 7%, $10 par (20,000 shares auth., 14,000 shares issued) Preferred stock subscribed (6,000 shares) Common stock, no par (40,000 shares auth., 16,300 shares issued) Common stock subscribed (4,000 shares) Additional paid-in-capital: Paid-in-capital in excess of par-preferred Paid-in-capital from sale of treasury stock Total paid-in-capital $140,000 60,000$200,000 $163,000 40,000203,000 $56, ,600 $459,600 Paid-in-capital is further separated by source…. Preferred, common, subscriptions, excess of par, etc.

Stockholders’ Equity Paid-in-capital: Preferred stock, 7%, $10 par (20,000 shares auth., 14,000 shares issued) Preferred stock subscribed (6,000 shares) Common stock, no par (40,000 shares auth., 16,300 shares issued) Common stock subscribed (4,000 shares) Additional paid-in-capital: Paid-in-capital in excess of par-preferred Paid-in-capital from sale of treasury stock Total paid-in-capital $140,000 60,000$200,000 $163,000 40,000203,000 $56, ,600 $459,600 Stock characteristics are indicated…. Dividend rate for preferred, Par or no par value

Stockholders’ Equity Paid-in-capital: Preferred stock, 7%, $10 par (20,000 shares auth., 14,000 shares issued) Preferred stock subscribed (6,000 shares) Common stock, no par (40,000 shares auth., 16,300 shares issued) Common stock subscribed (4,000 shares) Additional paid-in-capital: Paid-in-capital in excess of par-preferred Paid-in-capital from sale of treasury stock Total paid-in-capital Retained Earnings Less treasury stock (2,000 shares at cost) Total stockholders’ equity $140,000 60,000$200,000 $163,000 40,000203,000 $56, ,600 $459,600 60,000 $519,600 22,000 $497,600 No. of shares authorized, subscribed, issued and held as treasury are indicated.

Stockholders’ Equity Paid-in-capital: Preferred stock, 7%, $10 par (20,000 shares auth., 14,000 shares issued) Preferred stock subscribed (6,000 shares) Common stock, no par (40,000 shares auth., 16,300 shares issued) Common stock subscribed (4,000 shares) Additional paid-in-capital: Paid-in-capital in excess of par-preferred Paid-in-capital from sale of treasury stock Total paid-in-capital Retained Earnings Less treasury stock (2,000 shares at cost) Total stockholders’ equity $140,000 60,000$200,000 $163,000 40,000203,000 $56, ,600 $459,600 60,000 $519,600 22,000 $497,600 Retained Earnings is listed after all paid-in-capital.

Stockholders’ Equity Paid-in-capital: Preferred stock, 7%, $10 par (20,000 shares auth., 14,000 shares issued) Preferred stock subscribed (6,000 shares) Common stock, no par (40,000 shares auth., 16,300 shares issued) Common stock subscribed (4,000 shares) Additional paid-in-capital: Paid-in-capital in excess of par-preferred Paid-in-capital from sale of treasury stock Total paid-in-capital Retained Earnings Less treasury stock (2,000 shares at cost) Total stockholders’ equity $140,000 60,000$200,000 $163,000 40,000203,000 $56, ,600 $459,600 60,000 $519,600 22,000 $497,600

Stockholders’ Equity Paid-in-capital: Preferred stock, 7%, $10 par (20,000 shares auth., 14,000 shares issued) Preferred stock subscribed (6,000 shares) Common stock, no par (40,000 shares auth., 16,300 shares issued) Common stock subscribed (4,000 shares) Additional paid-in-capital: Paid-in-capital in excess of par-preferred Paid-in-capital from sale of treasury stock Total paid-in-capital Retained Earnings Less treasury stock (2,000 shares at cost) Total stockholders’ equity $140,000 60,000$200,000 $163,000 40,000203,000 $56, ,600 $459,600 60,000 $519,600 22,000 $497,600 Treasury stock is subtracted from total of paid-in-capital and retained earnings.