1. Corporations: Organization, Stock Transactions & Dividends
Chapter 11
Corporations: Organization, Stock Transactions & Dividends

2. Corporation a legal entity,
distinct and separate from the individuals who create and operate it
can acquire, own, and dispose of property in its own name
Sells shares of ownership called _________
The stock of the corporation is owned by _____________________.

3. What are Public Corporations?1
What are Public Corporations? .

4. What are Private Corporations?1
What are Private Corporations?

5. What is the Board of Directors?1
What is the Board of Directors?

6. 1 Exhibit 1 Organizational Structure of a Corporation Stockholders
Board of Directors
Officers
Employees

7. Advantages of Corporations
Separate legal entity
Limited liability
Easy capital generation
Easy to transfer ownership
Continuous existence

8. Disadvantages of Corporations
Government regulation (SOX)
Double taxation
Owner is separate from management; management’s interests may conflict with shareholders’ interests

9. Formation of corporation
File application of incorporation with the state
Organize in the state with the most favorable laws (Delaware)

10. Formation of corporation
File articles of incorporation with the state
Formally creates the corporation
States authorized shares: maximum # of shares the corporation is allowed to issue
States par value: arbitrary amount used to record common stock

11. Initial public offering
Selling shares of stock to investors to raise capital for the business
Underwriter helps corporation with this

12. Shares of stock
Issued shares: shares that have been transferred to shareholders =
Outstanding shares: shares that are still being held by shareholders +
Treasury shares: shares that the corporation has bought back from shareholders

13. Classes of stock Common stock: carry voting rights
Rank behind creditors and preferred stockholders
Preferred stock: have a preference for dividends – receive a certain amount of dividends before common stockholders can receive any dividends

14. Organizational Expenses
Costs of forming the corporation
Are incurred prior to the start of operations
Include:
State incorporation fees
Costs or printing stock certificates
Accounting fees
Attorney fees
Record as Dr Cr.
Organizational Expense 1,000
Cash ,000

15. Issuance of stock
In order to record stock issuance, you need the par value
Selling price of shares = market value

16. Issuance of stock Premium: stock is issued at a price higher than par
Discount: stock is issued at a price lower than par
rarely happens
not allowed in some states

17. Issuance of stock Dr. Cr. Cash (# of shares X selling price)
Common Stock (# of shares X par value)
Paid in capital in excess of par, Common (Difference)

18. Issuance of stock Dr. Cr. Cash (# of shares X selling price)
Preferred Stock (# of shares X par value)
Paid in capital in excess of par, Preferred (Difference)

19. Issuance of stock Some states have no-par stock
Sometimes, no-par stock will have a stated value
Stated value is treated the same as par value when recording issuance of stock

20. Issuance of stock Record issuance of no-par stock with a stated value:
Dr Cr.
Cash (# of shares X selling price)
Common Stock (# of shares X stated value)
Paid in capital in excess of stated value, Common (Difference)

21. Issuance of stock
In some states, no-par stock doesn’t have a stated value
Dr. Cr.
Cash (# of shares X selling price)
Common Stock (# of shares X selling price)

22. Issuance of stock for noncash asset
Record assets received at their fair market value
if assets’ fair market value is not known, record the assets at the stock market value

23. Issuance of stock for noncash asset
Ex. Issued 10,000 shares of $10 par common stock for Land with a fair market value of $200,000. Stock market price = $17 per share
Dr. Cr.
What would the journal entry be if the Land’s fair market value cannot be determined?

24. Stockholders’ equity section of Balance Sheet
Paid in Capital
Preferred Stock, %, par, # of sh auth., issued
Excess of issue price over par
Common Stock, par, # of sh auth., issued
From sale of treasury stock
Total Paid in Capital
Retained Earnings
Total
Deduct Treasury Stock (# of shares at cost)
Total Stockholders’ Equity

25. Stockholders’ equity section of Balance Sheet
Contributed Capital
Preferred Stock, %, par, # of sh auth., issued
Common Stock, par, # of sh auth., issued
Additional paid in capital
From sale of treasury stock
Total Contributed Capital
Retained Earnings
Total
Deduct Treasury Stock (# of shares at cost)
Total Stockholders’ Equity

26. Declaration of dividend
Distribution to shareholders
Declared by the Board of Directors
Once declared, become a legal obligation upon declaration
Only paid on outstanding shares (not on treasury shares)

27. Cash dividends
Corporation must have sufficient Retained Earnings and Cash
Usually paid quarterly

28. Declaration of cash dividend
Date of declaration Dr Cr.
Cash dividends *
Cash dividends payable *
* Amount = # of shares X amount set by Board

29. Declaration of dividend
Date of record
Date on which ownership of stock is determined for purposes of receiving dividend; No journal entry made

30. Declaration of dividend
Date of payment Dr Cr.
Cash dividends payable *
Cash *
*amount from Declaration entry

31. Cash Dividend Example
Espinoza Corporation is authorized to issue $ par value common stock. It has 160,000 shares issued and 140,000 shares outstanding. On June 5, the Board of Directors declared a cash dividend of $ .50 per share to be paid on June 25 to stockholders of record on June 15.

32. Stock Dividend Distributes shares to stockholders
Done to reward stockholders
Transfers amount from retained earnings to contributed capital
Does not change total stockholders’ equity
Usually accounted for at market price
Will affect market price, because now there are more shares outstanding

33. Stock Dividend Example: Declare a 5% stock dividend
10,000 shares outstanding
market price = $10, par = $1
# of shares in stock dividend =
# of shares outstanding X %

34. Stock Dividend Example: Declare a 5% stock dividend
10,000 shares outstanding
market price = $10, par = $1
Date of declaration
Journal entry: Dr. Cr.
Stock dividends # of shares in dividend X market price

35. Stock Dividend Example: Declare a 5% stock dividend
10,000 shares outstanding
market price = $10, par = $1
Date of declaration
Journal entry: Dr. Cr.
Stock dividends
Stock Dividend Distributable # of shares in dividend x par

36. Stock Dividend Example: Declare a 5% stock dividend
10,000 shares outstanding
market price = $10, par = $1
Date of declaration
Journal entry: Dr. Cr.
Stock dividends
Stock Dividend Distributable
Paid in capital in excess of par, Common difference

37. Stock Dividend Date of record
Ownership on this day determines recipient of stock dividend
No journal entry

38. Stock Dividend Date of Distribution Journal Entry Dr. Cr.
Stock Dividend Distributable
Common Stock

39. Stock Dividend
Stock Dividend Distributable is part of contributed capital (paid in capital)
Stock Dividends is closed into Retained Earnings the same way Cash Dividends is

40. Before and after stock dividend
Before After
# of total shares ,000
Individual stockholder 1,000

41. Stock Split
Usually done by a corporation to lower market price and make stock easier to trade
Increases # of issued shares
Par value is reduced in the same proportion

42. Stock Split Stockholders’ Equity Accounts remain the same
Since no accounts change, no journal entry is required

43. Stock Split New number of shares: Number of shares before the split
X amount of split
= Number of shares after the split

44. Stock Split New Par value Par value before the split
Divided by the amount of the split
= the par value after the split

45. Stock Split Example: Corporation has 10,000 shares with a $4 par value
2 for 1 stock split is declared
# of shares Par
Before the split
After the split

46. Preferred Stock
Dividends rights may be stated in monetary terms or as a %
Monetary terms: $2 preferred stock means that each share will receive a $2 per share annual dividend
Percentage: Annual Dividends calculated as par value X %

47. Preferred Stock Cumulative preferred stock
If dividends aren’t paid in the current year, they carry forward to the next year
Dividends in arrears: dividends that have carried forward from the previous year
Preferred stockholders must be paid the current dividends + dividends in arrears before common stockholders receive any dividends
After Preferred stock dividends are paid in full, the common stockholders receive the rest of the dividends

48. Preferred Stock Noncumulative preferred stock
If dividends aren’t paid in the current year, they are lost

49. Preferred Stock Dividend Example
Cormer Corporation has 20,000 shares of $100 par, 6% cumulative preferred stock and 60,000 shares of $10 par value common stock. Calculate the total dividends and dividends per share on preferred stock and common stock, if dividends paid in 2006 – 2009 are $80,000, $60,000, $180,000 and $300,000.

50. Preferred Stock Dividend Example
Jackson Corporation has 10,000 shares of $50 par, $2 cumulative preferred stock and 20,000 shares of $10 par value common stock. Calculate the total dividends and dividends per share on preferred stock and common stock, if dividends paid in 2007 – 2010 are $10,000, $15,000, $40,000 and $300,000.

51. Treasury stock
Stock that has been issued to shareholders and then reacquired by the corporation
Reasons why company buys treasury stock:

52. Treasury stock
Stock that has been issued to shareholders and then reacquired by the corporation
Reasons why company buys treasury stock:

53. Treasury stock
Has no voting rights
Receives no dividends

54. Treasury stock Has no voting rights Receives no dividends
Purchase is recorded at cost
Dr Cr.
Treasury stock (# of shares X purchase price)
Cash

55. Treasury stock
Ex.: Corporation purchased 1,000 shares of $10 par value stock for the treasury for $15 on Feb.1
Dr Cr.
Treasury stock (# of shares X purchase price)
Cash

56. Sale of Treasury stock
After the company has held treasury stock, it may decide to sell the stock again
Treasury stock can be sold for the same price it was purchased for
Dr Cr.
Cash # of sh X selling price
Treasury stock # of sh X cost

57. Sale of Treasury stock
After the company has held treasury stock, it may decide to sell the stock again
Treasury stock can be sold for more than it was purchased for
Cash # of sh X selling price
Treasury stock # of sh X cost
Paid in capital, treasury difference

58. Sale of Treasury stock
After the company has held treasury stock, it may decide to sell the stock again
Treasury stock can be sold for less than it was purchased for
Cash # of sh x selling price
Paid in capital, treasury difference
Treasury stock # of sh X cost

59. Sale of Treasury stock
Ex.: On Mar. 1, sold 500 of the treasury shares that were purchased for $15 on Feb. 1. The selling price on Mar. 1 was $17.
Dr Cr.

60. Sale of Treasury stock
Ex.: On Mar. 15, sold the remaining 500 treasury shares that were purchased for $15 on Feb. 1. The selling price on Mar. 15 was $12.
Dr Cr.

61. Stockholders’ equity section of Balance Sheet
Paid in Capital
Preferred Stock, %, par, # of sh auth., issued, outst.
Common Stock, par, # of sh auth., issued, outst.
Excess of issue price over par
From sale of treasury stock
Total Paid in Capital
Retained Earnings
Total
Deduct Treasury Stock
Total Stockholders’ Equity

62. Stockholders’ equity section of Balance Sheet
Paid in Capital
Preferred Stock, %, par, # of sh auth., issued
Excess of issue price over par
Common Stock, par, # of sh auth., issued
From sale of treasury stock
Total Paid in Capital
Retained Earnings
Total
Deduct Treasury Stock (# of shares at cost)
Total Stockholders’ Equity 62

63. Restriction on Retained Earnings
Also called Appropriations
Makes a portion of retained earnings unavailable for distributing dividend
Usually reported in the Notes to the Financial Statements

64. Prior period adjustment
Correction of error from math mistake or wrong application of accounting principle that isn’t discovered in the period it occurred
Reported as an adjustment to the beginning balance of Retained Earnings

65. 6
Retained Earnings Statement

66. Statement of Stockholders’ Equity
Usually prepared when corporation has changes to stock and paid-in capital accounts in addition to net income and dividends

67. 6
Statement of Stockholders’ Equity