1. Click to edit Master title style 1 1 1 13 Corporations: Organization, Stock Transactions, and Dividends

2. Click to edit Master title style 2 2 2 13-1 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.

3. Click to edit Master title style 3 3 3 13-1 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.

4. Click to edit Master title style 4 4 4 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

5. Click to edit Master title style 5 5 5 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. 13-1

6. Click to edit Master title style 6 6 6 9 Employees Stockholders Officers Board of Directors 13-1 Exhibit 1 Organizational Structure of a Corporation

7. Click to edit Master title style 7 7 7 13-1 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)

8. Click to edit Master title style 8 8 8 13-1 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)

9. Click to edit Master title style 9 9 9 13-1 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.

10. Click to edit Master title style 10 16 13-1 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. 5Organizational Expense8 500 00 Cash8 500 00 Paid costs of organizing the corporation.

11. Click to edit Master title style 11 Describe the two main sources of stockholders’ equity. Objective 2 13-2

12. Click to edit Master title style 12 13-2 The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital.

13. Click to edit Master title style 13 13-2 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

14. Click to edit Master title style 14 20 13-2 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.

15. Click to edit Master title style 15 13-2 A debit balance in Retained Earnings is called a deficit. Such a balance results from accumulated net losses.

16. Click to edit Master title style 16 Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. Objective 3 13-3

17. Click to edit Master title style 17 13-3 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.

18. Click to edit Master title style 18 13-3 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.

19. Click to edit Master title style 19 13-3 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.

20. Click to edit Master title style 20 26 Authorized 13-3 Number of Shares Authorized, Issued, and Outstanding IssuedOutstanding

21. Click to edit Master title style 21 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. 13-3 Major Rights That Accompany Ownership of a Share of Stock

22. Click to edit Master title style 22 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. 13-3 Two Primary Classes of Paid-In Capital

23. Click to edit Master title style 23 29 13-3 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$20,000$9,000$62,000 Amount retained 10,000 6,000 40,000 Amount distributed$10,000$3,000$22,000 2006 2007 2008

24. Click to edit Master title style 24 30 13-3 Dividends to Common and Preferred Stock

25. Click to edit Master title style 25 33 13-3 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. Issuing Stock Cash1,500 000 00 Issued preferred stock and common stock at par for cash. Preferred Stock500 000 00 Common Stock1,000 000 00

26. Click to edit Master title style 26 13-3 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.

27. Click to edit Master title style 27 35 13-3 Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. Cash110 000 00 Issued $50 par preferred stock at $55. Preferred Stock100 000 00 Paid-in Capital in Excess of Par—Preferred Stock10 000 00 Premium on Stock

28. Click to edit Master title style 28 36 13-3 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 120 000 00 Issued $10 par common stock valued at $12 per share, for land. Common Stock100 000 00 Paid-in Capital in Excess of Par20 000 00

29. Click to edit Master title style 29 37 13-3 A corporation issues 10,000 shares of no- par common stock at $40 a share. Cash 400 000 00 Issued 10,000 shares of no- par common stock at $40. Common Stock400 000 00 No-Par Stock

30. Click to edit Master title style 30 38 At a later date, the corporation issues 1,000 additional shares at $36. Cash 36 000 00 Issued 1,000 shares of no-par common stock at $36. Common Stock36 000 00 13-3

31. Click to edit Master title style 31 13-3 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.

32. Click to edit Master title style 32 40 Using the same data as we used for par the transaction is recorded as follows: 13-3 Cash400 000 00 Issued 10,000 shares of no- par common at $40. Stated value, $25. Common Stock250 000 00 Stated Value Paid-in Capital in Excess of Stated Value150 000 00

33. Click to edit Master title style 33 41 13-3 Cash36 000 00 Issued 1,000 shares of no- par common at $36. Stated value, $25. Common Stock25 000 00 Paid-in Capital in Excess of Stated Value11 000 00 The corporation issued 1,000 shares of no-par common stock at $36 (stated value, $25).

34. Click to edit Master title style 34 Journalize the entries for cash dividends and stock dividends. Objective 4 13-4

35. Click to edit Master title style 35 Today’s Stock Market Report Knives are up sharply Dairy cows were steered into a bull market Pencils lost a point Hiking gear is trailing

36. Click to edit Master title style 36 13-4 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

37. Click to edit Master title style 37 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. 13-4 Three Important Dividend Dates

38. Click to edit Master title style 38 47 Dec.1Cash Dividends 42 500 00 Declared cash dividend. Cash Dividends Payable42 500 00 Heber Corporation records the $42,500 liability on the declaration date. 13-4

39. Click to edit Master title style 39 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

40. Click to edit Master title style 40 49 The third important date is the date of payment. On January 2, Hiber issues dividend checks. Three Important Dividend Dates Jan. 2Cash Dividends Payable 42 500 00 Paid cash dividend. Cash 42 500 00 13-4

41. Click to edit Master title style 41 A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend. Stock Dividends 13-4

42. Click to edit Master title style 42 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. 13-4

43. Click to edit Master title style 43 53 13-4 Dec. 15 Stock Dividend (100,000 x $31 market)3,100 000 00 Declared 5% (100,000 share) stock dividend on $20 par common stock with a market value of $31 per share. Stock Dividend Distributable 2,000 000 00 Paid-in Capital in Excess of Par—Common Stock1,100 000 00 The entry to record the declaration of the 5 percent stock dividend is as follows:

44. Click to edit Master title style 44 54 13-4 Jan.10Stock Dividends Distributable 2,000 000 00 Issued stock for the stock dividend. Common Stock2,000 000 00 On January 10, the number of shares out- standing is increased by 100,000. The following entry records the issue of the stock:

45. Click to edit Master title style 45 Journalize the entries for treasury stock transactions. Objective 5 13-5

46. Click to edit Master title style 46 Today’s Stock Report Analysts reported the cereal market popped after a cold snap causing Kellogg stock to crackle Kimberly-Clark reported that while Huggies dropped, Cottonelle cleaned up the market and Scott tissue touched a new bottom Meanwhile, Coca-Cola fizzled While Pepsi went flat

47. Click to edit Master title style 47 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

48. Click to edit Master title style 48 59 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 45 000 00 Purchased 1,000 shares of treasury stock at $45. Cash45 000 00 13-5

49. Click to edit Master title style 49 60 Later, 200 shares of treasury stock were sold for $60 per share. Cash 12 000 00 Sold 200 of treasury stock at $60. Treasury Stock*9 000 00 13-5 Paid-in Capital from Sale of Treasury Stock3 000 00 *The amount debited to Treasury Stock per share when purchased is the amount per share that must be credited to that account when sold.

50. Click to edit Master title style 50 61 Sold 200 shares of treasury stock at $40 per share. Cash8 000 00 Sold 200 of treasury stock at $40. Treasury Stock9 000 00 13-5 Paid-in Capital from Sale of Treasury Stock 1 000 00

51. Click to edit Master title style 51 Describe and illustrate the reporting of stockholders’ equity. Objective 6 13-6

52. Click to edit Master title style 52 Today’s Stock Market Report The price of Helium is up Feathers are down The paper industry is stationary Fluorescent tubing was dimmed today with light trading

53. Click to edit Master title style 53 65 13-6 Stockholders’ Equity Section of a Balance Sheet

54. Click to edit Master title style 54 68 Retained Earnings Statement 13-6

55. Click to edit Master title style 55 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.

56. Click to edit Master title style 56 70 13-6 Statement of Stockholders’ Equity 7

57. Click to edit Master title style 57 Describe the effect of stock splits on corporate financial statements. Objective 7 13-7

58. Click to edit Master title style 58 Today’s Stock Market Report Elevators rose while escalators continued their slow decline Weights were up in heavy trading Light switches were off Mining industry hit rock bottom

59. Click to edit Master title style 59 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

60. Click to edit Master title style 60 13-7 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.

61. Click to edit Master title style 61 76 BEFORE STOCK SPLIT 4 shares, $100 par $400 total par value 20 shares, $20 par AFTER 5:1 STOCK SPLIT $400 total par value 13-7

62. Click to edit Master title style 62 13-7 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.

63. Click to edit Master title style 63 1. 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:

64. Click to edit Master title style 64 4. 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:

65. Click to edit Master title style 65 Describe the nature of the corporate form of organization. Objective 1 13-1

66. Click to edit Master title style 66 1.First step in forming a corporation is to file an application of incorporation with the state. 13-1 Forming a Corporation  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)

67. Click to edit Master title style 67 13-1 Examples of Corporations and Their States of Incorporation 14

68. Click to edit Master title style 68 2.After the application is approved, the state grants a charter or articles of incorporation which formally create the corporation. 13-1 3.Management and the board of directors prepare bylaws which are operation rules and procedures. Forming a Corporation (Concluded)