1. Corporations & Stock Transactions
By Rachelle Agatha, CPA, MBA
Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve, Duchac

2. Objectives: Describe the nature of the corporate form of organization.
Objectives:
Describe the nature of the corporate form of organization.
Describe the two main sources of stockholders’ equity.
Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock.

3. Objectives:
Journalize the entries for cash dividends and stock dividends.
Journalize the entries for treasury stock transactions.
Describe and illustrate the reporting of stockholders’ equity.
Describe the effect of stock splits on corporate financial statements.

4. Describe the nature of the corporate form of organization.
Objective 1
Describe the nature of the corporate form of organization.

5. 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.

6. 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.

7. 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.

8. The stockholders control a corporation by electing a board of directors. The board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers.

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

10. A corporation exists separately from its owners.
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)

11. 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)

12. Stockholders control management through a board of directors.
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.

13. Forming a Corporation
First step in forming a corporation is to file an application of incorporation with the state.
Because state laws differ, corporations often organize in states with more favorable laws.
More than half of the largest companies are incorporated in Delaware (see Exhibit 3 in Slide 14).
(Continued)

14. Corporations and Their States of Incorporation

15. Forming a Corporation
After the application is approved, the state grants a charter or articles of incorporation which formally create the corporation.
Management and the board of directors prepare bylaws which are operation rules and procedures.
(Concluded)

16. 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. 5 Organizational Expense
Cash
Paid costs of organizing the corporation.

17. Describe the two main sources of stockholders’ equity.
Objective 2
Describe the two main sources of stockholders’ equity.

18. The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital.

19. Stockholders’ Equity
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).

20. 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.

21. A debit balance in Retained Earnings is called a deficit. Such a balance results from accumulated net losses.

22. Objective 3
Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock.

23. 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.

24. 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.

25. 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.

26. Number of Shares Authorized, Issued, and Outstanding
Number of Shares Authorized, Issued, and Outstanding
Outstanding
Authorized
Issued

27. The right to vote in matters concerning the corporation.
Major Rights That Accompany Ownership of a Share of Stock
The right to vote in matters concerning the corporation.
The right to share in distributions of earnings.
The right to share in assets on liquidation.

28. Two Primary Classes of Paid-In Capital
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.

29. 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, $9,000 $62,000
Amount retained , , ,000
Amount distributed $10, $3,000 $22,000

30. Dividends to Common and Preferred Stock

31. 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.

32. Year Year Year 3
Amount distributed $10,000 $25,000 $80,000
Preferred dividend (20, shares) 10, , ,000
Common dividend (100,000
shares) $ $ 5,000 $60,000
Dividends per share:
Preferred $0.50 $1.00 $1.00
Common stock None $0.05 $0.60

33. Issuing Stock
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.
Cash 1,
Preferred Stock
Common Stock 1,
Issued preferred stock and common stock at par for cash.

34. 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.

35. Premium on Stock
Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.
Cash
Preferred Stock
Paid-in Capital in Excess of
Par—Preferred Stock
Issued $50 par preferred stock at $55.

36. 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
Common Stock
Paid-in Capital in Excess of Par
Issued $10 par common stock valued at $12 per share, for land.

37. No-Par Stock
A corporation issues 10,000 shares of no-par common stock at $40 a share.
Cash
Common Stock
Issued 10,000 shares of no-par common stock at $40.

38. At a later date, the corporation issues 1,000 additional shares at $36.
Cash
Common Stock
Issued 1,000 shares of no- par common stock at $36.

39. 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.

40. Stated Value
Using the same data as we used for par the transaction is recorded as follows:
Cash
Common Stock
Paid-in Capital in Excess of Stated Value
Issued 10,000 shares of no-par common at $40. Stated value, $25.

41. The corporation issued 1,000 shares of no-par common stock at $36 (stated value, $25).
Cash
Common Stock
Paid-in Capital in Excess of Stated Value
Issued 1,000 shares of no-par common at $36. Stated value, $25.

42. On March 6, Limerick Corporation issued for cash 15,000 shares of no-par common stock at $30. On April 13, Limerick issued at par 1,000 shares of 4%, $40 par preferred stock for cash. On May 19, Limerick issued for cash 15,000 shares of 4%, $40 par preferred stock at $42.
Journalize the entries to record the March 6, April 13, and May 19 transactions.

43. Mar. 6 Cash 450,000
Common Stock 450,000
(15,000 shares x $30)
Apr. 13 Cash 40,000
Preferred Stock 40,000
(1,000 shares x $40)
May 19 Cash ,000
Preferred Stock 600,000
Paid-in Capital in Excess of Par 30,000
(15,000 shares x $42)

44. Journalize the entries for cash dividends and stock dividends.
Objective 4
Journalize the entries for cash dividends and stock dividends.

45. Sufficient retained earnings Sufficient cash
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.
Sufficient retained earnings
Sufficient cash
Formal action by the board of directors

46. Three Important Dividend Dates
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.

47. Heber Corporation records the $42,500 liability on the declaration date.
Dec. 1 Cash Dividends
Cash Dividends Payable
Declared cash dividend.

48. Three Important Dividend Dates
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.

49. Three Important Dividend Dates
The third important date is the date of payment. On January 2, Hiber issues dividend checks.
Jan Cash Dividends Payable
Cash
Paid cash dividend.

50. The important dates in connection with a cash dividend of $75,000 on a corporation’s common stock are February 26, March 30, and April 2. Journalize the entries required on each date.
Feb. 26 Cash Dividends 75,000
Cash Dividends Payable 75,000
Mar. 30 No entry required.
Apr. 2 Cash Dividends Payable 75,000
Cash 75,000

51. Stock Dividends
A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend.

52. 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.

53. The entry to record the declaration of the 5 percent stock dividend is as follows:
Dec. 15 Stock Dividend (100,000 x $31 market) 3,
Stock Dividend Distributable 2,
Paid-in Capital in Excess of Par—Common Stock 1,
Declared 5% (100,000 share) stock dividend on $20 par common stock with a market value of $31 per share.

54. On January 10, the number of shares out-standing is increased by 100,000. The following entry records the issue of the stock:
Jan. 10 Stock Dividends Distributable 2,
Common Stock 2,
Issued stock for the stock dividend.

55. Journalize the entries required on June 14, July 1, and August 15.
Vienna Highlights Corporation has 150,000 shares of $100 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 $110 a share on June 14.
Journalize the entries required on June 14, July 1, and August 15.

56. June 14 Stock Dividends (150,000 x 4% x $110) ,000
Stock Dividends Distributable
(6,000 x $100) ,000
Paid-in Capital in Excess of Par—
Common Stock ($660,000 – $600,000) ,000
July 1 No entry required.
Aug. 15 Stock Dividend Distributable 600,000
Common Stock ,000

57. Journalize the entries for treasury stock transactions.
Objective 5
Journalize the entries for treasury stock transactions.

58. Treasury Stock Transactions
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.

59. Purchased 1,000 shares of treasury stock at $45.
On January 5, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share. The cost method for accounting for treasury stock is used.
Treasury Stock
Cash
Purchased 1,000 shares of treasury stock at $45.

60. Later, 200 shares of treasury stock were sold for $60 per share.
Later, 200 shares of treasury stock were sold for $60 per share.
Cash
Treasury Stock*
Paid-in Capital from Sale of Treasury Stock
Sold 200 of treasury stock at $60.
*The amount debited to Treasury Stock per share when purchased is the amount per share that must be credited to that account when sold.

61. Sold 200 shares of treasury stock at $40 per share.
Sold 200 shares of treasury stock at $40 per share.
Cash
Paid-in Capital from Sale of Treasury Stock
Treasury Stock
Sold 200 of treasury stock at $40.

62. On May 3, Buzz Off Corporation reacquired 3,200 shares of its common stock at $42 per share. On July 22, Buzz Off sold 2,000 of the reacquired shares at $47 per share. On August 30, Buzz Off sold the remaining shares at $40 per share.
Journalize the transactions of May 3, July 22, and August 30.

63. May 3 Treasury Stock (3,200 x $42) 134,400
Cash 134,400
July 22 Cash (2,000 x $47) 94,000
Treasury Stock (2,000 x $42) 84,000
Paid-in Capital from Sale of Treasury
Stock [2,000 x ($47 – $42)] 10,000
Aug. 30 Cash (1,200 x $40) 48,000
Paid-in Capital from Sale of Treasury
Stock [1,200 x ($42 – $40)] 2,400
Treasury Stock (1,200 x $42) 50,400

64. Describe and illustrate the reporting of stockholders’ equity.
Objective 6
Describe and illustrate the reporting of stockholders’ equity.

65. Stockholders’ Equity Section of a Balance Sheet

66. 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.
Common Stock, $50 par $1,500,000
Paid-in Capital in Excess of Par 160,000
Paid-in Capital from Sale of
Treasury Stock 44,000
Retained Earnings 4,395,000
Treasury Stock 120,000 66

67. Stockholders’ Equity
Paid-in capital:
Common stock, $50 par
(40,000 shares authorized,
30,000 shares issued) $1,500,000
Excess of issue price over par ,000 $1,660,000
From sale of treasury stock ,000
Total paid-in capital $1,704,000
Retained earnings 4,395,000
Total $6,099,000
Deduct treasury stock (5,000 shares at cost) ,000
Total stockholders’ equity $5,979,000

68. Retained Earnings Statement

69. Restrictions
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.

70. Statement of Stockholders’ Equity

71. Dry Creek Camera Inc. reported the following results for the year ending March 31, 2008:
Retained earnings, April 1, 2007 $3,338,500
Net income 461,500
Cash dividends declared 80,000
Stock dividends declared 120,000
Prepare a retained earnings statement for the fiscal year ended March 31, 2008.

72. RETAINED EARNINGS STATEMENT For the Year Ended March 31, 2008
DRY CREEK CAMERAS INC.
RETAINED EARNINGS STATEMENT
For the Year Ended March 31, 2008
Retained earnings, April 1, $3,338,500
Net income $461,500
Less dividends declared 200,000
Increase in retained earnings ,500
Retained earnings, March 31, $3,600,000

73. Describe the effect of stock splits on corporate financial statements.
Objective 7
Describe the effect of stock splits on corporate financial statements.

74. 13-7
Stock Splits
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.

75. 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.

76. 20 shares, $20 par
AFTER 5:1 STOCK SPLIT
$400 total par value
BEFORE STOCK SPLIT
4 shares, $100 par
$400 total par value

77. 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.

78. Summary Nature of Corporations Main sources of stockholders equity
Characteristics of stock
Journalize transactions
Reporting of Stockholders Equity