1. Corporations: Organization and Capital Stock
Chapter 18

2. Defining a corporation; establishing a corporation;
Learning Objective 1
Defining a corporation;
establishing a corporation;
listing the advantages and
disadvantages of a corporation.

3. Learning Unit 18-1 (Forming a Corporation)
Incorporators write up and submit
articles of incorporation to the state.
Step 1
The Secretary of State issues a charter.
Step 2
Stockholders are the owners.
Step 3
A board of directors is elected by
stockholders at the first meeting.
Step 4

4. Learning Unit 18-1 (Forming a Corporation)
What are some advantages of the
corporate form of organization?
Limited liability/separate legal entity
Unlimited life
Ease of transferring ownership
No mutual agency
Ease of raising capital

5. Learning Unit 18-1 (Forming a Corporation)
What are some disadvantages?
Difficulties in forming a corporation
Corporate taxation (double taxation)

6. Journalizing entries for issuing par-value stock, no-par stock,
Learning Objective 2
Journalizing entries for issuing
par-value stock, no-par stock,
and no-par with stated value stock.

7. Learning Unit 18-2 (Stockholders’ Equity)
Paid-in Capital
Retained Earnings 9

8. Learning Unit 18-2 (Stockholders’ Equity)
Capital stock
Authorized capital stock
Issued capital stock
Outstanding capital stock

9. Learning Unit 18-2 (Stockholders’ Equity)
Capital stock is the amount
paid to the business.
Par value is the legal capital
assigned to each share.
Usually it is the amount paid
to the corporation for the
initial issuances of stock.
Retained earnings is net income
less net loss less dividends.

10. Learning Unit 18-2 (Stockholders’ Equity)
What are some characteristics
of common stock?
Voting rights
Profit sharing
Selling the stock
Preemptive right (right to
maintain ownership ratio)

11. Learning Unit 18-2 (Stockholders’ Equity)
What are some characteristics
of preferred stock?
First claim to dividend distribution
Usually have no voting rights

12. Learning Unit 18-2 (Stockholders’ Equity)
Dividends are paid to stockholders as
their share of the corporation’s profit.
Common dividends
Preferred dividends

13. Learning Unit 18-2 (Stockholders’ Equity)
Cumulative preferred stockholders have
a right to receive a dividend each year.
Amounts not declared and
paid accumulate each year.
These are paid before any current
year dividends (dividends in arrears).

14. Learning Unit 18-3 (Recording Transactions)
Roger Company sells 200 shares of a $10
par value common stock at $10 per share.
Accounts Affected Category Rules
Cash Asset Dr. 2,000
Common Stock SE Cr. 2,000

15. Learning Unit 18-3 (Recording Transactions)
Assume R.C. sells 300 shares of $50 par value
preferred stock at $50 on March 18, 20xx.
What is the journal entry?
March 18, 20xx
Cash ,000
Preferred Stock ,000

16. Learning Unit 18-3 (Recording Transactions)
Roger Co. sells 50 shares of $10 par value
common stock at $15 on June 8, 20xx.
June 8, 20xx
Cash
Common Stock
Paid-in Capital in Excess
of Par Value – Common 12

17. Learning Unit 18-3 (Recording Transactions)
Moss Co. sells 300 shares of a no-par
common stock for $20 per share.
Accounts Affected Category Rules
Cash Asset Dr. 6,000
Common Stock SE Cr. 6,000

18. Calculating dividends on preferred and common stock.
Learning Objective 3
Calculating dividends on
preferred and common stock.

19. Learning Unit 18-3 (Recording Transactions)
A $150,000 dividend is declared.
Preferred stock is 6 % and fully participating.
Preferred stock: 1,000 shares, $200 par.
Common stock: 6,000 shares, $100 par.

20. Learning Unit 18-3 (Recording Transactions)
Preferred dividend:
1,000 shares × $200 × .06 = $12,000
Common dividend:
6,000 shares × $100 × .06 = $36,000
How is the remaining
$102,000 allocated?

21. Learning Unit 18-3 (Recording Transactions)
Preferred stock:
$200,000 ÷ $800,000 × $102,000 = $25,500
Common stock:
$600,000 ÷ $800,000 × $102,000 = $76,500

22. Recording capital stock transactions under a stock
Learning Objective 4
Recording capital stock
transactions under a stock
subscription plan.

23. Learning Unit 18-4 (Recording Transactions)
Common Stock Subscribed
Subscriptions Receivable – Common Stock 15

24. Learning Unit 18-4 (Recording Transactions)
When stock is fully paid, it is issued.
The par value is then transferred to common stock.
Assume that Krump Corporation received
subscriptions for 1,000 shares of $100
par-value common stock at $160 per share.
What is the entry?

25. Learning Unit 18-4 (Recording Transactions)
Subscriptions Receivable –
Common Stock ,000
Common Stock Subscribed ,000
Paid-in Capital in Excess of Par ,000
Received stock subscriptions 13

26. Learning Unit 18-4 (Recording Transactions)
Stockholders' Equity
Source-of-capital approach
Legal capital approach 16

27. End of Chapter 18