1 / 58

Chapter 11

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. . Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Chapter 11. Corporations: Organization, Capital Stock Transactions, and Dividends.

desiderio
Download Presentation

Chapter 11

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Chapter 11 Corporations: Organization, Capital Stock Transactions, and Dividends Financial and Managerial Accounting 8th Edition Warren Reeve Fess PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

  2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

  3. Objectives 1.Describe the nature of the corporate form of organization. 2.List the major sources of paid-in capital, including the various classes of stock. 3.Journalize the entries for issuing stock. 4.Journalize the entries for treasury stock transactions. 5.State the effect of stock splits on corporate financial statements. After studying this chapter, you should be able to:

  4. Objectives 6.Journalize the entries for cash dividends and stock dividends. 7.Describe and illustrate the reporting of stockholders’ equity. 8.Compute and interpret the dividend yield on common stock.

  5. A corporation is a legal entity, distinct and separate from the individuals who create and operate it.

  6. Stakeholders include those who have an economic interest in an organization and those who are affected by its activities.

  7. Board of Directors (elected by stockholders) Officers (selected by board of directors) Employees Organizational Structure of a Corporation Stockholders (owners of corporation stock)

  8. Forming a Corporation • First step is to file an application of incorporationwith 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. • State grants a charteror articles of incorporationwhich formally create the corporation. • Managementand board of directorspreparebylaws which are operation rules and procedures.

  9. Forming a Corporation On January 5, the firm paid the organization costs of $8,500. This amount includes legal fees, taxes and licenses, promotion costs, etc. Jan. 5 Organization Costs 8 500 00 Cash 8 500 00 Paid cost of organizing the corporation.

  10. Sources of Paid-In Capital Authorized Issued Outstanding Number of Shares

  11. Major Rights that Accompany Ownership of a Share of Stock Sources of Paid-In Capital 1. The right to vote in matters concerning the corporation. 2. The right to share in distribution of earnings. 3. The right to share in assets on liquidation.

  12. Common Stockholders Preferred Stockholders Money available for dividends Classes of Stockholders 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. Classes of Stockholders Common Stock—the basic ownership of stock with rights to vote in election of directors, share in distribution of earnings, and purchase additional shares. Preferred Stock—A class of stock with preferential rights over common stock in payment of dividends and company liquidation.

  14. Nonparticipating Preferred Stock A nonparticipating preferred stock is limited to a certain amount. Assume 1,000 shares of $4 nonparticipating preferred stock and 4,000 shares of common stock and the following: Net income $20,000 $55,000 $62,000 Amount retained 10,000 20,000 40,000 Amount distributed $10,000 $35,000 $22,000 200520062007

  15. Nonparticipating Preferred Stock Amount distributed $10,000 $35,000 $22,000 Preferred dividend (1,000 shares) 4,000 4,000 4,000 Common dividend (4,000 shares) $6,000 $31,000 $18,000 Dividends per share: Preferred $ 4.00 $ 4.00 $ 4.00 Common $ 1.50 $ 7.75 $ 4.50

  16. Cumulative Preferred Stock So, preferred dividends are two years in arrears. Assume 1,000 shares of $4 cumulative preferred stock and 4,000 shares of common stock. No dividends were paid in 2005 and 2006.

  17. Cumulative Preferred Stock On March 7, 2007, the board of directors declares dividends of $22,000.

  18. $4,000 $4,000 2006 2005 (In arrears) (In arrears) $10,000 $4,000 2007 (Current dividend) Cumulative Preferred Stock Preferred Stock Dividends Dividends Paid in 2007 Total dividends paid, $22,000 $4,000 $4,000 $4,000 Common Stock Preferred Stock

  19. 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.

  20. Issuing Stock On April 1, one-half of each class of authorized stock is issued at par for cash. Apr. 1 Cash 1,500000 00 Preferred Stock 500 000 00 Common Stock 1,000000 00 Issued preferred stock and common stock at par.

  21. Issuing Stock Common Stock and Preferred Stock accounts are controlling accounts. A record of each stockholders’ name, address, and number of shares is kept in a stockholders’ subsidiary ledger.

  22. Issuing Stock at a Premium On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. Mar. 15 Cash 110 000 00 Preferred Stock 100 000 00 Paid-in Capital in Excess of Par-- Preferred Stock 10 000 00 Issued 2,000 shares of $50 par preferred stock at $55.

  23. Issuing Stock at a Premium When stock is issued for more than its par, the stock has sold at a premium. It has sold at a discountif issued for less than its par. The $10,000 excess is recorded in a separate accountbecause some states do not consider this to be part of legal capital and may be used for dividends.

  24. Issuing Stock at a Premium On Nov. 12, 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. Nov. 12 Land 120 000 00 Common Stock 100 000 00 Paid-in Capital in Excess of Par 20 000 00 Issued $10 par common stock valued at $12 per share, for land.

  25. Issuing Stock at a Premium Stock issued for assets other than cash should be recorded at the fair market value of theassetor fair market value of the stock,whichever can be more clearly determined.

  26. Issuing Stock at No-Par On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share. Feb. 23 Cash 400 000 00 Common Stock 400 000 00 Issued 10,000 shares of no-par common stock at $40.

  27. Issuing Stock at No-Par Later, on March 9, the corporation issues 1,000 additional shares at $36. Mar. 9 Cash 36 000 00 Common Stock 36 000 00 Issued 1,000 shares of no-par common stock at $36.

  28. Issuing Stock at No-Par Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital.

  29. Issuing Stock at No-Par Also, no-par stock may be assigned a stated value per share. The stated value is recorded similar to a par value.

  30. Issuing Stock with a Stated Value On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25. Mar. 30 Cash 40 000 00 Common Stock 25 000 00 Paid-in Capital in Excess of Stated Value 15 000 00 Issued 1,000 shares of no-par common stock at $36; stated value, $25.

  31. Treasury Stock Transactions Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This stock is referred to as treasury stock.

  32. Treasury Stock Transactions Treasury stockis stock that: 1. has been issued as fully paid. 2. has been reacquired by the corporation. 3. has not been canceled or reissued. A commonly used method of accounting for treasury stock is the cost method.

  33. Treasury Stock Transactions Cost Method On January 5, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share. Jan. 5 Treasury Stock 45 000 00 Cash 45 000 00 Purchased 1,000 shares of treasury stock at $45.

  34. Treasury Stock Transactions Cost Method On June 2, sold 200 shares of treasury stock at $60 per share. June 2 Cash 12 000 00 Treasury Stock 9 000 00 Paid-in Capital from sale of Treasury Stock 3 000 00 Sold 200 shares of treasury stock at $60.

  35. Treasury Stock Transactions Cost Method On September 3, sold 200 shares of treasury stock at $40 per share. Sep. 3 Cash 8 000 00 Paid-in Capital from Sale of Treasury Stock 1 000 00 Treasury Stock 9 000 00 Sold 200 shares of treasury stock at $60.

  36. Stock Splits A corporation sometimes reduces the par or stated value of their common stock and issues a proportionate number of additional shares. This is called a stock split.

  37. AFTER 5-1 STOCK SPLIT 20 shares, $20 par $400 total par value Stock Splits BEFORE STOCK SPLIT 4 shares, $100 par $400 total par value

  38. Stock Splits A stock split does not change the balance of any corporation accounts. However, it can make the stock more attractive to investors by reducing the price of a share,

  39. Accounting for Cash Dividends • Dividends are distributions ofretained earningsto stockholders. • Dividends may be paid in cash, stock, or property. • Dividends, even on cumulative preferred stock, are never required, but once declared become a legal liabilityof the corporation.

  40. Retained Earnings 50,000 Accounting for Cash Dividends Corporations generally declare and pay cash dividendson shares outstanding when three conditions exist: 1. Sufficient retained earnings 2. Sufficient cash 3. Formal action by the board of directors

  41. Accounting for Cash Dividends There are three important dates relating the dividends.

  42. Accounting for Cash Dividends First is the date of declaration. Assume that on December 1, Hiber Corporation declares a $42,500 dividend.

  43. Accounting for Cash Dividends Date of Declaration Dec. 1 Cash Dividends 42 500 00 Cash Dividend Payable 42 500 00 Declared cash dividend.

  44. Accounting for Cash Dividends The second important date is the date of record. For Hiber Corporation this would be December 11.

  45. Accounting for Cash Dividends On this date, ownership of shares determines who receives the dividend. No entry is required.

  46. 2 Accounting for Cash Dividends The third important date is the date of payment. On January 2, Hiber issues dividend checks.

  47. Accounting for Cash Dividends Date of Payment Jan. 2 Cash Dividends Payable 42 500 00 Cash 42 500 00 Paid cash dividends.

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

  49. Accounting for Stock Dividends Stock dividends transfer pro rata shares of stock to stockholders. Assume Hendrix Corporation issues a 5% stock dividend on common stock, $20 par, 2,000,000 shares issued.

  50. Accounting for Stock Dividends Hendrix Corporation, December 15 (before dividend) Common Stock, $20 par $40,000,000 Paid-in Capital in Excess of Par--Common Stock 9,000,000 Retained Earnings 26,600,000 Dec. 15 Stock Dividends 3,100 000 00 Stock Dividends Distributable 2,000000 00 Paid-in Capital in Excess of Par—Common Stock 1,100000 00 Declared stock dividend.

More Related